Fed Holds Rates Steady in November

Federal Reserve building | Image by christianthiel.net

The Federal Reserve decided to hold rates steady in November, leaving one more quarter-point rate hike on the table for December.

The Federal Open Markets Committee (FOMC), which sets U.S. monetary policy, decided to maintain the target range for the federal funds rate at 5.25% to 5.5% on Wednesday, marking the last rate pause of 2023 and the second consecutive meeting where the committee left rates unchanged.

The Fed began its current tightening cycle in March 2022, having raised its benchmark interest rate 11 times since then. This has brought the target range for the federal funds rate from near zero during the pandemic to a current range of 5.25% to 5.5% in November 2023.

While the Fed has taken an aggressive policy stance to stomp out high prices in the U.S., inflation still remains well above the Central Bank’s 2% target.

To determine the future direction of monetary policy, the FOMC said it will “take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”

During his scheduled press conference on Wednesday, Fed Chair Jerome Powell said that lowering inflation to 2% would most likely require a slowdown in growth and dampening in the labor market.

“I still believe, and my colleagues for the most part still believe … that we will need to see some slower growth and some softening in the labor market to fully restore price stability,” Powell said during Wednesday’s press conference.

Wednesday’s FOMC statement went largely as expected, according to PNC chief economist Gus Faucher.

Despite the FOMC maintaining the benchmark rate at 5.25% to 5.5%, Faucher told The Dallas Express via email that the committee’s statement suggested near-term rate hikes were still possible.

Faucher cites the Fed’s recent Summary of Economic Projections (dot plot), which points to one more rate hike this year.

“The dot plot from the previous meeting in mid-September indicated that a majority of participants supported one more fed funds rate hike in 2023, which at this point more would have to come at the FOMC’s next meeting on December 13,” Faucher told The Dallas Express.

While inflation has come down from its peak in June 2022, Powell explained that the process of getting inflation sustainably down to 2% still “has a long way to go.”

The resilience of the U.S. economy means the Fed will likely keep its policy stance unchanged into 2024, according to Whitney Watson, CIO of fixed income and liquidity solutions at Goldman Sachs Asset Management.

“The rise in inflation expectations, owing to higher gas prices, combined with strong economic activity, preserves the prospect of another rate hike,” Watson said, per CNBC. “Conversely, a more pronounced economic slowdown caused by the growing impact of higher interest rates might accelerate the timeline for transitioning to rate cuts.”

During a recent speech to members of the 50 Club, Federal Reserve Bank of Cleveland president Loretta Mester — one of several non-voting members of the FOMC — explained that additional policy firming would be needed to achieve price stability over the long run.

“I suspect we may well need to raise the fed funds rate once more this year and then hold it there for some time as we accumulate more information on economic developments and assess the effects of the tightening in financial conditions that have already occurred,” Mester said.

With November’s FOMC meeting resulting in another rate pause/skip, all eyes are set on the next monetary policy meeting scheduled for December 12 to 13. As of market close on November 1, fed futures based on the CME FedWatch Tool showed an 82.8% probability of another rate pause in December and a 17.2% chance of a quarter-point rate hike.

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