Oct 24, 2023|Market Insights- 3 min
At its last meeting, the Fed held rates steady for the second time this year, following a decision to pause in June. The benchmark lending rate of 5.25-5.50% remains at its highest in 22 years.
Source: Trading Economics, U.S. Federal Reserve
What can we expect from the next two-day meeting (October 31 to November 1) and what does it mean for investors?
September Meeting Recap
Committee members were still uncertain about the future in the Fed September meeting. The general agreement was that rates should remain “restrictive” until inflation is under control.[1]
Projections released by the group indicate higher economic growth this year (up from 1.0% to 2.1%) and lower unemployment (down from 4.1% to 3.8%).[2] These optimistic figures imply that the U.S. will avoid a recession next year as Fed Chairman Jerome Powell confirmed that a soft-landing was a “plausible outcome.”
But continued economic resilience means that the fight against inflation may not be over. With another 0.25% rate hike expected this year, the 0.5% rate cuts throughout 2024 are less than previously expected.
How have events affected the outlook since September?
Competing forces
Key developments since September have complicated the picture for the Fed.
The conflict in Gaza which began on October 7 has captured world headlines. Its market impact so far has been limited to higher oil prices (Brent Crude is above $90 per barrel), but the conflict may have implications on global trade.[3]
The bond market is in a growing wave of turmoil. With the jobs report showing a still healthy US economy,[4] a recession (and the ensuing rate cuts) seems less likely. This has raised long-term Treasury yields and put bond prices under pressure.
The September Consumer Price Index remained at 3.7%.[5] The fact that it has not declined may indicate that inflation is either resurging or stabilizing above the 2% target.[6]
Interpreting the signal
If the world is on the brink of a second Ukraine-style geopolitical upset, rate increases may be unnecessary or even harmful. But inflation remains stubbornly above the target, which would support a “higher for longer” rate strategy.
Fed statements since the beginning of the Gaza crisis indicate softened sentiment around rate increases.
Several officials have acknowledged “tightening” financial conditions based on the bond market, but disagreement persists as to whether this is due to fundamental economic changes or mere market expectations.
Minneapolis Fed President Neel Kashkari summarized the conundrum succinctly on October 10. He observed that if the yield increase is due to markets predicting higher interest rates for longer, the Fed “might actually need to follow through” to maintain these rates.[7]
Conclusion
The market consensus is that the Fed will hold rates steady, with only a 10% probability of a rate increase on November 1 according to the CME FedWatch Tool.
Philadelphia Federal Reserve President Patrick Harker recently observed, “By doing nothing, we are still doing something."[8] In times of uncertainty and high emotion, inaction is often the best option for central bankers and investors alike.
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