Fed's Message to Markets: We may slow our pace, but a pause in rate hikes is not in sight

DEWITT, Mich. - Nov. 8, 2022 - PRLog -- Last week the Federal Reserve (Fed) raised the fed funds rate by 75 basis points (0.75%) at its November FOMC meeting. This was the Fed's fourth consecutive 75-basis-point rate hike, which brings the fed funds rate from near zero to 4.0% in about eight months, an unprecedented pace of interest-rate hikes in the U.S. economy.

While the initial release of the Fed statement seemed more benign – the FOMC acknowledged the cumulative tightening it had done and noted that these rate increases operate with a lag to the real economy – the press conference that followed with Fed Chair Jerome Powell took on a notably hawkish tone. In our view, there were three key messages that Chair Powell and the FOMC delivered at the meeting last week:

1. The Fed may move at a more gradual pace of rate hikes, but this does not mean a pause is coming:
   While Chair Powell did acknowledge that the pace of rate hikes may slow, perhaps as soon as the December meeting, he emphasized that any discussion around pausing this rate-hiking cycle was still "very premature." This reduces any likelihood of a pause in the December or perhaps even February meetings.
2. The peak fed funds rate is likely higher than what the FOMC outlined in its September meeting:
   Chair Powell also noted that recent data indicates the ultimate interest rate will be higher than what was outlined in the September FOMC meeting. In September, the Fed laid out a set of economic projections that indicated the peak fed funds rate would be around 4.6% sometime in 2023. However, Powell seemed to endorse a higher terminal rate in last week's meeting, perhaps moving more in line with market expectations. In fact, market expectations for a peak fed funds rate of 5.0%-5.3% sometime in the first half of 2023 have remained generally steady, even after the Fed meeting.

The labor market remains resilient – a tale of good news and bad news

Perhaps one of the silver linings from last week's data is that the U.S. labor economy remains in healthy shape. We saw this in last Friday's nonfarm-payrolls jobs report for the month of October, where jobs increased by 261,000, above expectations of an increase of 200,000. The unemployment rate did tick higher to 3.7%, up from 3.5%, as labor-force participation moved lower, from 62.3% to 62.2%. However, wage gains – a signal for services inflation broadly – remained elevated at 4.7% year-over-year, in line with estimates but below last month's 5.0% gains. On a monthly basis, wage gains rose by 0.40%, which exceeded expectations of 0.30%.

Sources:  Bloomberg