- The Federal Reserve (Fed) continued its fight against inflation with a fourth-straight supersized 75 basis point (0.75%) Fed funds rate hike to reach a target of 3.75% to 4.0% as we had expected.
- Markets now have more conviction that the Fed could slow down the pace of hikes at the coming December meeting, although Chair Powell threw some cold water on a potential “pivot” by stating there is still more work to do in raising rates. The upcoming inflation and jobs data will prove whether the cumulative tightening of financial conditions has truly started to reduce demand enough to slow the rate of inflation.
- Futures markets are now pricing in just a 25% chance of another 0.75% rate hike in December compared to two weeks ago when they were pricing in a 65% chance. A 50 basis point (0.50%) rate hike would be a ratcheting down in pace but would still be faster than a normal tightening cycle.
- The latest statement from the Federal Open Market Committee (FOMC) added how they would increase their policy rate until it became “sufficiently restrictive” in order to bring inflation down to their 2% target over time. They noted that job gains have remained robust, which gives them the room to continue raising rates. But they also recognize that monetary policy works with a lag, giving markets hope that the pace of rate increases would slow soon.
- After initially reacting positively to the FOMC statement as a potential sign that the Fed may “pivot” to a slower pace of rate increases, markets wavered after Chair Powell reiterated that they are not close to pausing their interest rate hikes.
- Immediately following the decision, the U.S. Treasury yield curve dropped as bond traders looked at the FOMC statement as dovish. But after Chair Powell’s press conference, yields rose again across the curve in anticipation of a higher potential ending point for the Fed funds rate despite maybe a slower pace of getting there.
- Equity markets were volatile with swings in both directions, but ultimately ended down on the day. The perceived hawkishness that the Fed may continue to raise rates, even if at a slower pace, pushed the S&P 500 to finish lower by 2.5% on the day.
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