BY: Matthew Kimbrough
Portfolio Manager
Leading Up to Yesterday’s FOMC Meeting
Over the past 6 weeks, there has been a string of positive economic data, including (but not limited to):
- Yesterday’s JOLTS survey shows an increase in job openings.
- A Nonfarm Payrolls print of +336k (vs expectations of +170k) in early October.
- The first estimate of Q3 2023 GDP coming in at an annualized rate of 4.9%
- The Core PCE Deflator (the Fed’s preferred measure of inflation) fell to 3.7% YoY.
- Core CPI falling from 4.3% to 4.1%.
The conflux of this positive data, the adjustments to September’s Statement of Economic Projections, and the need to issue additional Treasuries to fund this year’s $2 trillion U.S. budget deficit has led Treasury yields to rise significantly since the last FOMC meeting. The yield on the flagship 10-year U.S. Treasury Note, for instance, rose from 4.40% on 9/20 to 4.93% on 10/31.
Higher Treasury yields create tighter credit conditions, so in a way, this may lessen the need for additional Fed Funds rate hikes going forward. However, as economist Stephen Stanley recently stated in Barron’s: “whether the FOMC ends up hiking again or not, the Committee will need to keep the threat of additional rate increases active well into next year, until it is far clearer that the Fed has successfully brought inflation under control.”
The Statement & Decision
The Fed chose to hold the Fed Funds rate steady today at a range of 5.25% to 5.50%.
There were no significant amendments to the Statement. Economic activity “expanded at a strong pace in the third quarter” instead of “has been expanding at a solid pace.”
The next Statement of Economic Projections will be released at the December FOMC meeting.
FED Chair Powell’s Press Conference
“The Committee is not considering changing the pace of balance sheet runoff.”
“The idea that it would be difficult to hike again after a long pause is just not right.”
“We’re going meeting by meeting. We’re asking ourselves whether we’ve achieved a stance of policy that is sufficiently restrictive to bring inflation back town to 2% over time… We’ve come very far with this rate hiking cycle, very far.”
An increase in longer-term treasury yields has contributed to a tightening of financial conditions since the summer. Changes to financial conditions could have implications for the broader path of monetary policy, as long as two conditions are met: the tighter conditions would need to be persistent, and they can’t simply be a reflection of expected policy moves.
“The Committee is not thinking about rate cuts at all right now.”
The Market’s Reaction
During the press conference, Treasuries rallied, and yields fell precipitously (12 to 19 basis points across the curve). 2-year Treasury yields hit a low watermark not seen since early September. Powell’s commentary is being interpreted as slightly dovish, and the likelihood that the Fed is finished hiking seems to have increased. CME’s FedWatch tool puts the probability of a December rate hike at around 15% as of the end of the press conference.
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