On November 1, the Federal Open Market Committee (FOMC) of the United States made a significant announcement regarding its monetary policyThe committee has decided to maintain the target range for the federal funds rate between 5.25% and 5.5%, a move that was widely anticipated in the marketThis marks the second consecutive pause in interest rate hikes since September of this year, signaling a cautious approach amidst a mixed economic landscape.
In their latest statement, the Federal Reserve indicated that the U.Seconomy had expanded robustly during the third quarterNotably, while job growth has slowed since earlier this year, it remains strong, and inflation rates continue to hover at elevated levels
The resilience of the American banking system was also underscored, yet tightening financial conditions for households and businesses could potentially impact economic activities, employment, and inflation, although the extent of such impacts remains uncertain.
Following the announcement, Fed Chair Jerome Powell addressed reporters, emphasizing that future decisions regarding tightening monetary policy would be informed by incoming data and its implications for economic activity and inflationHe articulated that reducing rates is currently not part of the Federal Reserve’s considerations, reinforcing a firm stance on combating inflation.
Market reactions reflected positive sentiment following the Fed's announcement, with the three major indices closing higher
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The Nasdaq Composite saw a notable increase, rising by 210.23 points or 1.64%, ending at 13,061.47; the S&P 500 also made gains, adding 44.06 points (1.05%) to finish at 4,237.86; and the Dow Jones Industrial Average rose by 221.71 points, up 0.67% to close at 33,274.58.
Proceeding with Caution
The latest statement aligns with previous communications from the Fed, emphasizing that the FOMC will continue to assess new information and its potential impacts on monetary policyThe committee remains acutely focused on inflation risks, reaffirming their commitment to a 2% inflation targetThey stated that they stand ready to adjust their policy stance appropriately, should any risks jeopardize their inflation goals.
Recent data from the U.S
Department of Labor revealed that the Consumer Price Index (CPI) for September rose by 3.7% year-over-year, with a monthly increase of 0.4%, both figures surpassing expectationsIn comparison to prior meetings, this announcement appears to provide a more optimistic assessment of economic conditions than was conveyed in September.
For instance, the assessment of third-quarter economic activity shifted from describing it as “expanding at a steady pace” to a more vigorous “expanding at a strong pace,” reflecting improved indicatorsAdditionally, the annualized GDP growth rate registered at 4.9%, a notable increase from the second quarter's 2.1%, and marking the highest growth rate since the fourth quarter of 2021.
However, economists, including Xie Xiao from Credit Suisse, caution against overly optimistic interpretations of this data
They warn that the factors contributing to such robust growth could pivot towards negative influences, suggesting a potential deceleration in the fourth quarter that might fall below the long-term growth rateFactors such as the resumption of student loan repayments, high gasoline prices, tightening lending conditions, and waning pent-up demand could dampen economic momentum.
In his press conference, Powell remarked that the Fed's policies have become restrictive, citing that they have begun to see these measures take effect though their full impact has yet to materializeHe noted considerable progress in their current tightening cycle and indicated that the Fed officials believe they are nearing the end of this phase, prompting cautious movements moving forward.
No Consideration for Rate Cuts
A reporter raised the question during the conference regarding the implications of a continued pause in rate hikes into December, asking whether this would indicate the end of the current tightening cycle
Powell responded with a measured “not necessarily.” He underscored the misconception that once a pause occurs, it becomes increasingly challenging to resume rate hikes, labeling such a belief as “incorrect.”
Furthermore, Powell expressed uncertainty about whether current monetary policies would suffice to bring down inflationHe reassured attendees that if economic indicators signal the necessity for further hikes, the Fed would consider such actions; however, he maintained that rate cuts are not on the immediate agenda.
Commentator Nick Timiraos, known for his insightful takes on Fed communications, observed that Powell did not elaborate on the likelihood of an additional rate hike as forecasted in September's projections
Instead, he simply indicated that new forecasts would be submitted in December, an interpretation seen as leaning dovishly.
According to the CME Group’s FedWatch Tool, the market currently assesses a 77.5% probability that the Fed will maintain the 5.25%-5.50% target range in December, while there is a 22.5% chance of a 25 basis point increase to the 5.50%-5.75% rangeIt further anticipates a 70.3% probability of no change in January 2024 while forecasting a 27.6% likelihood of a cumulative 25 basis points increase by that time.
Additionally, Powell alluded to the risks posed by a potential government shutdown, highlighting it as a looming economic threatHe also touched upon the ongoing conflict in the Middle East, acknowledging that global political issues have undoubtedly gained importance, and the Fed's responsibility lies in monitoring the economic implications of such developments