The Fed kept rates on hold Wednesday, as widely expected.
There was no chance of an increase. Officials spent the better part of October explaining how and why the rapid rise in long-end US Treasury yields witnessed since early August could theoretically stand in for a rate hike, or anyway assist the Fed in its efforts to curb demand and cool the economy.
Jerome Powell effectively ruled out a November increase during remarks to the Economic Club of New York, even as he simultaneously emphasized that rates aren’t unduly restrictive, or at least not if you go by the recent performance of the US economy.
The new FOMC statement described the pace of economic expansion, as tipped by the advance read on Q3 GDP, as “strong.” Jobs are likewise “strong,” even as they’ve “moderated” from earlier in the year.
Do note: Job gains re-accelerated from June, and the September NFP report came packaged with upward revisions, the first of 2023.
That re-acceleration appeared to motivate a tweak in the Fed’s language. In the September statement, job gains had “slowed in recent months.” Now, they’ve merely “moderated since earlier this year.”
The Fed reiterated that tighter credit availability will weigh on households and businesses, as well as on economic activity, hiring and inflation. Eventually. It’s just a matter of how much and when. It’s all very “uncertain”
The forward guidance was unchanged. Additional policy firming “may” be appropriate.
Although many on the Committee have indicated in public remarks that if it were up to them, rates wouldn’t rise further absent conclusive evidence that inflation is at risk of re-accelerating, others cling to the September dots, which narrowly tipped a slightly higher terminal rate. The market assigns some odds to a hike either next month or in January.
It was notable that the statement added the word “financial” to an otherwise unchanged second paragraph. It’s not just tighter credit conditions that will work towards restraining activity, hiring and inflation, but also tighter financial conditions.
That might seem trivial, but it’s actually quite important in the context of recent events and Fedspeak.
The chart above is familiar, and it’s also crucial. It tells the story of the only meaningful tweak to the FOMC statement. The key point (obviously) is the ~130bps increase in the term premium from late-July and the attendant FCI impulse.
October was all about a crescendo in the FCI tightening that accompanied the term premium repricing, and the extent to which that dynamic could do some of the Fed’s “dirty” work.
That notion was enshrined in the policy statement with the addition of one word (“financial”) on Wednesday.
This is good- in the reall world the longer tem cost of money is meaningful. I think that we had qe and rate uppression for a very long time. Younger traders have a lot of recency bias. Private equity and related institutions have reached critical mass as a percentage of economic activity. These are non reporting entities. So lots more data, but I would argue it is lower quality. The upper 20% had a great covid and their assets were on miracle gro. They don’t have tangible evidence that they are giveing those gains back yet. I think the other 80% are living a adifferent country with a different economy. It s time to use the term political economy. Now that we have EM levels of economic inequality we are at risk of electing a fascist gangster will want to destroy our institutions. As always, the next question is when will this stuff show up? Sitting and waiting, there is the art….
Oh, and I Ieft out war-Russia/Ukraine, Israel/hamas, hezbollah, Iran. Armenia/ Azerbaijan, Serbia/Kosovo- this plus climate change threaten the world food supply wihich will ignite more war.