Fed Tees Up Moderate December Hike

Federal Reserve Chairman Powell’s speech at the Brookings Institution was highly anticipated. And based on today’s price action…he did not disappoint.

There’s a lot to get through, but let’s look at takeaways from his speech and today’s economic data. 🔍

First, let’s recap what we already knew. November’s Fed Minutes told the market three things:

1. The terminal rate will be higher than initially expected;
2. Rates will stay higher for longer due to their lagging impact on the economy; and
3. A slowdown int he pace of rate increases is likely ahead.

That messaging was also reiterated by several Fed members’ press comments and speeches.

Now, let’s get into Powell’s speech and Q&A session at the Brookings Institution. 📝

He started by acknowledging the recent progress in the inflation data. However, he said, “Despite some promising developments, we have a long way to go in restoring price stability.” and “It will take substantially more evidence that inflation is declining and by any standard inflation remains far too high.”

Next, he recognized how poor the Fed and private sector’s inflation forecasting has been over the last year, stating, “…the path for inflation remains highly uncertain.”

As a result, rather than provide more inaccurate forecasts, he outlined what macro conditions the Fed needs to see for inflation to come down meaningfully. They included:

1. A sustained period of below-trend growth;
2. Goods prices easing due to a drop in demand and supply chains improving (i.e., supply/demand is more balanced); and
3. Housing services inflation beginning to fall in the latter half of 2023.

To encourage those economic conditions, the Fed expects to do several things through 2023.

1. They will raise interest rates to a level that is sufficiently restrictive (though there’s uncertainty around what rate will be sufficient);
2. They will moderate the pace of rate increases to avoid unnecessary risks to the economy; and
3. They will hold rates higher for longer due to the lagging effect of policy on the economy.

What really got markets going was Powell’s comment about the Fed’s December meeting. He suggested that the Fed could “Reduce the pace of rate increases as early as the December meeting…”

He also peppered in some hope for a “soft landing” during his Q&A, where he stated, “…I do believe  there is a path to a soft-ish landing.” When asked to clarify that, he said, “Unemployment goes up, but without a severe recession.” 🛬

With that said, he did say that history warns against reversing policy too soon. And that “…cutting rates is not something we want to do soon.” ⚠️

His final remarks were that the Fed would “Stay the course until the job is done.” 

Powell didn’t say much that we haven’t heard before. However, strongly hinting at a slowdown in the pace of hikes this December was enough to spark a rally in risk assets. 📈

There were some other great points, so we encourage you to watch the entire thing. But for now, let’s quickly review today’s economic data.

First up, the ADP Report showed that 127,000 jobs were added in November, well below the 190,000 estimated. It was also down from 239,000 in October. 🔻

Most of the gains came from the leisure and hospitality sector, which added 224,000 jobs. Meanwhile, there were major losses in manufacturing (-100,000), professional and business services (-77,000), financial activities (-34,000), and information services (-25,000). 

Overall, goods-producing industries experienced 86,000 job losses, while services industries added 213,000. Wage growth rose 7.6% YoY, down slightly from the 7.7% October rate. 🔺

Next, the Job Openings and Labor Turnover Survey (JOLTs) showed 10.33 million job openings in September. This left 1.7 job openings per available worker, which is down from a 2 to 1 ratio peak.

The labor market remains tight but continues to show signs of softening at the aggregate layoff. Today we saw layoff announcements from CNN, H&M, DoorDash, Kraken, and NPR. 

Manufacturing activity fell off a cliff, with October’s Chicago PMI reading falling for the third straight month to 37.2. That jives with the manufacturing job losses shown in the ADP report. 🏭

Housing continues to soften, with pending home sales falling 4.6% MoM and 37% YoY in October. 🏘️

Lastly, the U.S. economy’s Q3 GDP estimate was revised up to 2.9% after two-quarters of contraction. 

We’ll leave it there, but note that tomorrow’s PCE Price Index and Friday’s Non-Farm Payroll data will be watched closely. 👀