November 2nd  FOMC Follow-Up

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  • The FOMC voted today to raise the Federal Funds rate to a range of 3.75 – 4.00%, a 75 basis point increase. This decision was unanimously supported by the 12-member rate-setting committee and was also in-line with market expectations.
  • This vote is for the fourth consecutive 75 bps hike and sixth total of the year, with the FOMC having first moved the Fed Funds rate from zero in March. While last month’s headline inflation figure slowed modestly, the reported figures exceeded market expectations yet again which led investors to anticipate a 75 bps increase at this meeting as the Fed continues to attempt to reduce inflation.
  • The Committee’s official statement continued to mention that ongoing increases in the target range are necessary but added that they “will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments,” recognizing that their inflation fighting tool requires time to work.
  • While no updated projections were released, in the press conference Chairman Powell referenced that there is significant uncertainty to where rates will peak, and a figure produced today would have been higher than the 4.6% projection from September’s meeting. He also emphasized that the pace of the rate hikes is less important than the question of how high to raise rates and for how long.
  • Equity markets swung wildly today. Stocks were down early before rallying upon the release of the FOMC statement. Markets then retraced below the morning levels following the press conference on Chairman Powell’s hawkish sentiment. The S&P 500 was down 2.5% on the day. Treasury yields generally rose along the curve, with each of the 3-month, 2-year, and 10-year rates up today.

Economic Conditions

  • After two negative readings, GDP rose 2.6% in the third quarter but remains unchanged on the year. There are signs of slowing growth in spending and production, reflecting lower real disposable income and tighter financial conditions. Weaknesses have been particularly apparent in the interest-rate sensitive housing sector, driven by skyrocketing mortgage rates.
  • Economic data released since the previous meeting has reflected continued strength in the labor market with “demand substantially exceeding the supply of available workers” and continuously elevated inflation in both total and core (ex-food and energy) readings.
  • The policy rate is now at levels last seen in early 2008 as the economy was beginning to fall into a recession. At the press conference, Chairman Powell noted that the path for a soft landing to avoid recession has narrowed but it is still possible.

The FOMC is next scheduled to meet Dec 13-14, 2022


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