Federal Open Market Committee Statement: November 2023
Market Views from the Global Fixed Income, Currency & Commodities (GFICC) group
U.S. Rates Team
In line with market expectations, the Federal Open Market Committee (FOMC) voted to keep the federal funds rate unchanged in a target range of 5.25% – 5.50%. There were no dissents.
- Economic Assessment and Outlook
- The economic assessment remained brief and had minimal changes. The wording on economic activity was upgraded slightly from “solid” to “strong”, reflecting the data from the third quarter. Additionally, the decline in job growth was compared to the beginning of the year, as opposed to recent months, reflecting the uptick in September. They still view it as moderating.
- The Committee continues to view the banking system as sound and resilient but for the first time highlighted tighter financial conditions (in addition to credit conditions) as likely to weigh on the economy and inflation.
- Current Policy and Forward Guidance
- Future policy firming remains data dependent and will depend on the impacts of the cumulative tightening in policy and the lags in which policy impacts the economy.
Key Takeaways from Chair’s Press Conference:
- On the labor market, Chair Powell sounded relatively sanguine about the 336k NFP (Nonfarm Payrolls) print in September. He stated that it is “a strong pace that is nonetheless below earlier in the year. Nominal wage growth has shown some signs of easing, and job vacancies have declined.”
- On inflation, he was pleased with the lower readings over the summer, “but a few months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably toward our goal.” Furthermore, the committee recognizes that while progress has been made, further declines will “probably come in lumps and be bumpy,” so the best thing to monitor would be progress vs. the levels laid out in the September SEPs (Summary of Economic Projections).
- On additional rate hikes, he is primarily concerned with robust economic data feeding specifically into inflation, which would cause the Fed to hike further: “We are attentive to recent data showing the resilience of economic growth and demand for labor. Evidence of growth persistently above potential, or that tightness in the labor market is no longer easing, could put further progress on inflation at risk and could warrant further tightening of monetary policy.”
- On pausing and restarting, the chair was very clear: “The idea it would be difficult to raise again after stopping for a meeting or two is just not right.”
- On whether we are restrictive, Chair Powell suggested the level of policy is restrictive, meaning “that tight policy is putting downward pressure on inflation and the full effects of inflation have yet to be felt.” However, he also suggested the Fed may not be sufficiently restrictive. They are “not confident yet they have achieved such a stance…to bring inflation down to 2% over time…To say it a different way, we haven't made any decisions about future meetings.”
- On long-term yields rising and financial conditions tightening as a replacement for rate hikes, the Fed is looking at 2 conditions: “First, tighter conditions would need to be persistent, and that is something that remains to be seen….the second thing is that long-term rates can’t be a reflection of expected policy moves…[otherwise] if we didn’t follow through on them, then the rates would come back down.”
- The risks to monetary policy are balanced. The cumulative and lagged impacts of monetary policy are tightening financial and credit conditions.
- As we arrive at the end of the hiking cycle, the government bond market should see demand from investors looking to lock in relatively high risk-free rates. Despite recent resilience in growth, the impact of restrictive monetary policy should slow activity going forward and push inflation lower. As a result, we expect the 10-year Treasury yield to move lower in the final months of the year.