The Federal Reserve Open Markets Committee has concluded its October 31 - November 1 meeting, and it voted unanimously to hold interest rate unchanged at 5.25% to 5.50%.
The Fed's statement indicates that, while this is its second consecutive pause, the Fed is still determining the extent to which additional policy firming may be necessary. While job gains have moderated and tightening financial conditions (through higher long-term Treasury rates) have cooled off the economy, inflationary pressures remain elevated. Powell and his team vow to remain vigilant in their fight against inflation until they are confident that inflation is well on its way to the Fed's long-term 2% target.
This bias towards additional hikes is basically unchanged from its last meeting. The bias itself keeps markets on edge and contributes to ensuring that the market's expectations are that the Fed will keep rates higher for much longer.
Yet, if global markets continue to forecast a weakening economy in early 2024, the Fed can leave the door open to make additional Fed funds rate increases for a while, but it may be done for this cycle.
Jerome Powell gave an interesting speech in front of the Economic Club of New York earlier today.
I think that there are at least three main takeaways from this speech that depositors need to consider.
First, the Fed may not be done raising interest rates. The economy is still burning too hot and Powell is still not convinced that he has interest rates under control. Since he feels that the economy has been able to handle higher rates, he will not hesitate to raise rates well above the current 5.25 to 5.50% target. Conventional wisdom that the Fed is done or very near done with raising interest rates could be wrong.
Second, the Fed still has a 2% inflation target but that does not mean that long-term interest rates are going to go back to 2%. Powell does not seem alarmed that the 10-year or 30-year Treasury rates have moved much higher and he is not going to try to manage the long end of the curve in order to keep the cost of capital low for issuers or mortgage borrowers. He believes we are not going back to a disinflationary period, but one where investors will demand a risk premium for lending. (In the 19th to 23rd minutes of the speech, he gives some other possibilities why longer run bonds are moving higher).
Third, Powell says that the state of the banking system is very strong. He believes that banks, in general, have very strong balance sheets and the failures of Silicon Valley Bank and Republic Bank were not harbingers of an imminent banking crisis in late 2023 or 2024. (This is after the 34th minute).
Among all of Powell's speeches, this was his most candid. He also gave the most insight into all of the factors that the Fed considers in interest rate policy. Those interested in Fed policy may find it worthwhile to watch the entire speech below.
The Federal Reserve concluded its September 2023 meeting today, holding the Fed Funds rate at its current 5.25% to 5.50% target. The target rate remains at a 22 year high.
Fed Chair Jerome Powell did not declare victory in the war on inflation, leaving the possibility of another quarter point hike at its next meeting in November on the table. The average Fed target of Fed voting members for the end of 2024 has gone up to 5.10% from 4.60%, and many Fed voting members believe that there will be no change in the Fed funds rate before 2025. This high or higher for longer is the Fed's message.
Still, there are plenty of reasons why the Fed may declare victory on inflation sooner and begin to lower rates (as I discussed in this recent article).
The rising price of oil over the last couple of weeks creates a new wrinkle for the economy and complicates efforts to drive down inflation.
In the immediate aftermath of today's announcement, 2-year and 10-year US Treasuries hit their highest yields in over 14 years (over 5.15% and 4.35%, respectively). There are lots of competitive short-term CD rates today, but we expect more banks to now offer more competitive longer term CDs rates.
