The Federal Reserve hiked rates another 75 bps today as its fight against inflation continues. While Fed members and recent economic data largely telegraphed the increase, Powell’s commentary spooked the stock market and other risk assets.
Let’s get into the details. 📝
First, let’s talk about why stocks popped upon the initial release. A red-lined version from Nick Timiraos shows that the Fed not only delivered on its 75 bp hike but also added language suggesting more moderate increases would be ahead. At face value, that’s a slightly more “dovish” tone that we’ve seen from other central banks worldwide over the last month or two.
Fed hikes by 75 basis points.
New sentence in the FOMC statement signals more increases but hints at possibly smaller increments pic.twitter.com/nU13MVg5Sr
— Nick Timiraos (@NickTimiraos) November 2, 2022
Where things ran into trouble during Powell’s press conference. Again we’ll defer to Nick for another excellent summary here, but the critical difference is item #2.
The terminal fed funds rate initially discussed will likely have to rise. And rates will have to stay high for longer because it takes time for policy to work through the economy and have a meaningful impact on inflation. ⏳
The 3 takeaways from Powell's press conference:
1) The Fed could step down to a slower pace in Dec even if inflation data don't improve much
2) If there had been new estimates of the terminal funds rate released today, they would have moved up
3) Not ready to talk about a pause— Nick Timiraos (@NickTimiraos) November 2, 2022
In other words, rates will stay higher for longer. That’s not great for risk assets, especially growth stocks and speculative investments like crypto.
The Fed outwardly acknowledging the lagging effect of policy and baking that into its decisions is a significant change in its communication. Until now, the Fed said it would rely on lagging inflation indicators like the PCE index and continue hiking until the housing and labor markets cooled. 📉
This rhetoric created fear that it’d continue hiking blindly until something broke in the economy. And while it’s not drastically changing that approach, it at least acknowledged the limitations of its policy measures and has outlined a more measured approach for future hikes.
For now, expectations are for another 50 bp hike in December before the pace slows further in Q1.
After today’s ADP payroll report showed 239k jobs added in October and wage increases of 7.7% YoY, all eyes will be on Friday’s nonfarm payroll data to see how tight the labor market remains. In the meantime, it seems the tightening continues, and stocks are not loving it… 👎