Powell Sends Clear Message
November 7, 2022.
On November 2, as expected, the Federal Reserve raised rates by 75 basis points (bps). In its accompanying statement, the central bank said it would “take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation.” Investors promptly concluded this to mean that the pace of rate hikes will be slowing, with Fed funds futures indicating a terminal rate below 5%
And then… Fed Chair Powell began to talk, taking a different tack and quashing any hopes of a genuine Fed pivot. Powell warned the Fed had “some ways to go” in its quest to tame soaring prices and pointed to a series of economic reports suggesting it has yet to make a dent in inflation. “Data since our last meeting suggest that the ultimate level of interest rates will be higher than expected,” he added.
Markets quickly reversed course, with the S&P 500 closing down 2.5% and the tech-heavy Nasdaq falling 3.4%. Fed funds futures ratcheted up, ending the week above 5.2%, the highest this cycle. Powell did, however, hint at the possibility of adopting a less aggressive increase at the Fed’s next meeting in December: “That time is coming, and it may come as soon as the next meeting, or the one after that.”
“This statement and press conference allows the Fed to keep its options open… This is a paradigm shift where Powell is getting himself out of a necessary increase of 75 basis points,” Jamie Anderson, Head of US Trading at Insight Investment, said in an article for Financial Times. “Everybody wants to see the end of the hiking cycles, but it is impossible to see that until we start to see inflation actually start to come down,” he added.