In September, a majority of FOMC participants judged that one more increase in the target federal funds rate, at a future meeting would likely be appropriate. At the meeting last week, the decision was made to leave the policy interest rate unchanged. This despite strong economic growth, a strong labour market and fears headline inflation may be ticking up again.
The FOMC believes, the stance of policy is considered to be restrictive. Tight monetary policy is putting downward pressure on economic activity and inflation. The full effects of tightening to date have yet to be felt. It was time to hold and pause to monitor future developments.
The suspicion also is the Fed seeks to bring stability to the bond market, especially at the long end of the curve. Ten year and thirty year bond yields peaked at 5% in October, reviving fears the Bond Market Vigilantes were saddling up once again.
This morning ten years trade at 4.6%. Thirty year rates trade at 4.8%. Hardly a decisive move down but enough to steady nerves in a difficult market.
"We will continue to make our decisions meeting by meeting, based on the totality of the incoming data and their implications for the outlook for economic activity and inflation as well as the balance of risks.
In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee 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.
We remain committed to bringing inflation back down to our 2 percent goal and to keeping longer-term inflation expectations well anchored. Reducing inflation is likely to require a period of below-potential growth and some softening of labor market conditions. We at the Fed will do everything we can to achieve our maximum employment and price stability goals.
Markets now assume no further interest rate hikes. Rates will remain on hold until the second quarter next year. Our CME Fedwatch chart suggests two or possibly three cuts may be invoked by the end of 2024. It all goes to show ... by the end of 2024 ...
If the markets weren't confused before, they are definitely getting there now ....
The Saturday Economist
John Ashcroft publishes the Saturday Economist. Join the mailing list for updates on the UK and World Economy.
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