As expected, the Fed kept policy rates on hold in a unanimous decision at 5.25%-5.5% for the 2nd meeting in a row.
In the press release, the FED kept the optionality to raise rates again, if necessary. The tone was dovish, and for now, it increasingly looks like the FED is done with the cycle.
- Factors to consider for a “hawkish” stance:
- The economy and especially the labor market to be strong – US companies added fewer jobs than forecast in October, suggesting demand for workers in what’s been a historically strong American labor market may be starting to wane.
- Inflation to reshape the conditions: Powell says: “that 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”. For now, things are rather on the positive side.
- Powell notes that the process of returning inflation to 2% still has a long way to go. “Inflation has moderated, but a few months of good data is just the beginning”. For now, the rate of inflation ex housing is back to below 2% (YoY).
- The Fed is not fully confident yet that they have reached a sufficiently restrictive stance – we note that the FED is late in the cycle hence the work restrictive represents the past in this case.
- Factors for a “dovish” stance:
- The full effects of the interest cycle have yet to be felt.
- The labor market is coming into better balance – the Covid related workplace shifts are coming to an end.
- The Committee is proceeding “carefully”.
- “Slowing down is giving us a better sense of how much we need to do, if we need to do more”. [Powell]
- Fed members are still trying to gauge how long monetary policy lags are.
- The question they are asking themselves is not “should we hike more?”, but rather “when can we change the course of action?”,
- The published FED dot plots are history, they are not predicting the future.
- “Risks of doing too much versus too little are getting more balanced” à in other words, they are now as worried about growth as they are about inflation.
- On the recent rise in yields, the Fed considers that it is too early to say if they can act as a substitute for rate hikes. The key word here was “persistency”. Higher yields, a stronger USD and lower equity prices could matter for the Fed only if they are persistent.
- It is difficult to say with certainty whether they will hike again or not, but markets have clearly read this meeting as dovish.
- The cumulative probability of another hike has gone down from 39% to 27%
- The market is pricing the first cut by June 2024.
- Today’s lower-than-expected October ISM Manufacturing may have played a role in the “dovish” market’s reaction, so Friday’s October job report and ISM Services index will be closely watched and could affect those expectations.
- The bond market’s action has been quite exceptional today and is worth underlining, with the 2-yr down by 14bps from 5.08% to 4.94% and the 10-yr down by 20bps from 4.93% to 4.73%. Three events have contributed: (1) The Treasury’s lower than expected refunding plan at 1.30pm (with an effect mainly on the 10yr), (2) the US ISM manufacturing well below expectation (46.7 vs. 49 exp) at 3pm and (3) Jerome Powell’s press conference from 7.30pm to 8.30pm.