The Fed will slow the pace of increases at the next meeting
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On Wednesday (11/2), Jerome Powell and the Federal Reserve announced they wouldraise interest rates by 0.75%.
This was the expected rate hike — no one was surprised by this increase.
But markets and investors look to the future. While Powell didn't say anything explicitly, the Fed provided some guidance on their next steps.
Reading Between the Lines
Before Powell addresses the media, the Federal Reserve always issues a statement. The message in the statement does not vary much from meeting to meeting.
CNBC analyzes what is new orchanged between the two meetings; the statement is almost identical from the September to November meeting.
However, the Fed added one sentence that doesn't give much away on the surface, but reading between the lines gives insight into their next steps.
In determining the pace of future increases in the target range, the Committee 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
More to come later on what this could mean.
What Powell Said
If anyone needs optimism in their lives, they should never join the Federal Reserve or listen to Powell give his updates.
Powell must be skeptical and pessimistic to do his job properly.
And based on the current economic environment, Powell expressed several pessimistic statements during his press conference. When asked about the chance the economy doesn't enter apronounced contraction, Powell said it is still possible, but the path has narrowed since the September meeting.
More telling, Powell expressed that he expects the Federal Reserve to raise rates to a higher end goal than they had planned in September. The terminal rate, as it's called, is the rate that the Fed is satisfied with and no longer needs to keep increasing. The current market expectation is that rates won't top out until they hit 5%.
What It All Means
The stock market had a comforting bounce over the past few weeks. After dropping below $3,600 in mid-October, it flirted with $3,900 by the end of the month.
And at 2:30 PM Wednesday, right on cue with Powell's press conference, it started dropping and now sits around $3,700 (Thursday, 11/3 close). All those gains from the rebound were given up in a few days.
Referring to the change in the Fed's written statement, the committee seems to have finally realized that inflation will be elevated for an extended period (remember "transitory"). And they also seem to recognize that raising rates overnight will not magically fix it. Unfortunately, the Fed is not as powerful as they think they are — they can execute quantitative easing with much more success than quantitive tightening.
After three meetings of 0.75% increases, things have not gotten better. Inflation is still high (PCE inflation is up 6.2% on a yearly basis), and the employment market is still hot (unemployment is still below 4%).
The rate increases will take a while before the impact is seen; the main thing they've accomplished in the short term is spook investors.
But there's light at the end of the tunnel. The Fed realizes there is a lagged impact from rate increases. While tackling inflationis their number one priority, they won't raise rates excessively. I think they will use their next meeting to slow down rate increases.
Rates are currently at 4%, the highest since 2008. I believe they will not raise rates by 0.75% again. I would expect them to raise rates by 0.50% in December. This will allow them time to assess where markets are and how to proceed for 2023.
Another sign that rate hikes will slow and markets will be alright is the recently announced interest for I-bonds. Rates were announced this week at 6.89% for the next six months. This is down from 9.62%.
The lower rate signals inflation has peaked and is heading lower.
The Federal Reserve is powerful — and they want the economy to slow down. They need inflation to cool off. But what are theywilling to sacrificeto achieve that? Rates will rise, but the rate of increase will finally start to slow.
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