FOMC Meeting: The Fed signals a pivot while remaining hawkish

To no one’s surprise, the FOMC raised interest rates by 75bps for a fourth consecutive meeting, lifting the target range for the fed funds rate to 3.75% to 4.00%. The Fed signaled that the pace of rate hikes may slow as it assesses the cumulative impact of 375bps of rate hikes, which will affect inflation and the economy with a lag. Fed Chair Powell suggested the slowdown could occur as soon as December.

What you will learn:

• A slower pace of rate hikes doesn’t mean the Fed will pause anytime soon. Fed Chair Powell said – more than once – that the Fed still has a “ways to go” and said he expected that FOMC members’ projections for the fed funds rate will be revised higher next month. Overall, the Fed still isn’t seeing the types of inflation readings or easing of labor market conditions that might cause the Fed to think it should stop raising rates. Fed Chair Powell more than once described the US economy as strong.
• The Fed has more confidence in its ability to stimulate a slowing economy with its policy tools than in its capability to heal lasting damage from sticky inflation. Powell said, more than once, that the Fed “can use its tools” – presumably cutting rates and/or slowing or stopping QT if the economy weakens more than desired. We expect the Fed to slow the pace of rate hikes next month and look for a 50bps rate increase at the December meeting. Powell’s hawkish comments suggest there’s a meaningful risk of more rate hikes in 2023.