The Federal Reserve delivered a widely expected fourth consecutive short-term interest rate hike of 75 basis points, or 0.75%, when it wrapped up its regularly scheduled two-day policy meeting on Wednesday afternoon.
But the real question on every investor’s mind was whether Chair Jerome Powell would offer any reason to think that the central bank might be inclined to ease back on the size and pace of future rate increases.
And the answer to that, the experts say, was a resounding “Yes.”
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True, the latest Fed rate hike once again underscored the importance of the central bank taking a highly aggressive stance against the highest inflation readings in four decades.
More importantly, however, the Fed added some dovish remarks to its policy statement. New language included the bank’s commitment to “monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.” The Fed also for the first time acknowledged that its rapid pace of rate hikes might eventually hurt the economy with a “lag.”
With the latest policy proclamation now in the books, we decided to check in with economists, strategists, investment officers and other market pros to see what they have to say about the Fed’s rate-hike decision Wednesday. Please see a selection of expert commentary, sometimes edited for brevity, below:
“There were a few important changes to the policy statement. Most notably, the FOMC [Federal Open Market Committee] stated that ‘The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals.’ Market participants broadly suggested that these changes provide the Fed with leeway to begin slowing the pace of hikes while preserving optionality for further 0.75% hikes in case growth and inflation data surprise to the upside. We believe that today’s decision opens the door for a 0.5% hike at the December 14th FOMC meeting, data permitting. This view is in keeping with our standing investment recommendation that the market had priced too high a probability of an overly aggressive Fed, making valuations for shorter maturity Treasuries more attractive.” – BlackRock’s Gargi Chaudhuri, head of iShares Investment Strategy, Americas”Here’s where we are: The Fed raised rates another 75 basis points, and although it’s not an outright blink in the form of a pause, the Fed did wink. The Fed seems willing to consider the cumulative effect of its rate increases and the potential impact they may have on the economy and inflation, and not wait for the actual rear-looking numbers to come in. The Fed signaled today that it has shifted from a data-dependent stance to a forecast mindset, which in my opinion is where they should have been all along.” – Tom Siomades, chief investment officer at AE Wealth Management”As we move into the final weeks of 2022, it is clear the cumulative effect of Fed rate hikes initiated back in March will start to show. As we go forward into 2023, we look for the economy to enter a recession and for the contraction to be fairly shallow even though it will extend well into the second half or next year. As such, it will take time for the labor market to accumulate enough slack that the Fed feels the gains made in containing inflation will be sustainable.” – Steven Ricchiuto, U.S. chief economist at Mizuho Securities USA”Markets reacted positively to the announcement and the press release from the meeting, with equity markets up and fixed income yields down immediately following the announcement. The press release from the meeting added additional language that indicated that going forward the Fed may consider slowing their pace of hikes following four consecutive meetings with 75 basis point increases. The press release acknowledged the fact that the impact from higher rates on the economy has a lagging nature and that it may be appropriate to slow or even halt hikes in the future. All in all the release painted a picture of a Fed that is still committed to combating inflation, however the path and pace of future rate hikes is now expected to slow unless we see significantly higher inflation figures than anticipated throughout the rest of the year.” – Sam Millette, fixed income strategist at Commonwealth Financial Network”These changes to the statement indicate to us that the Committee is prepared to slow the pace of tightening at future meetings. But Chair Powell suggested in his post-meeting press conference that the FOMC is not yet done tightening policy. Moreover, the Committee may need to raise rates higher than most members thought in September. In our view, the bar for another 75 bps rate hike at the December 14 meeting is fairly high. Today’s events strengthen our conviction that the Committee will deliver a 50 bps rate hike in December. But there are two more employment reports and two more CPI reports that will be released between now and December 14. The outcome of the December 14 meeting will depend crucially on what those data releases tell the FOMC about the state of the U.S. economy.” – Jay Bryson, chief economist at Wells Fargo Securities “This decision was as expected and so the market has already braced for it. Given the latest rise in interest rates, we expect to see inflation cool down in November and see better news for the market as soon as December, despite ongoing stock market volatility during the crisis in Ukraine. Traders will soon be able to invest in bonds again – and while there will be continued exposure to turbulent market conditions, retail investors can benefit from the use of data and algorithmic trading.” – Damian Scavo, CEO and founder of algorithmic trading platform Streetbeat”This is the first time in this tightening cycle that the Fed mentioned policy ‘lags,’ following in the footsteps of the RBA, ECB, and BoC. Perhaps the Fed goes again by 25 or 50 basis points in December. And then as it does see what the ‘lags’ do, as the effects of the ‘cumulative’ tightening percolate through the data in early 2023, the Fed will be done. Equities will bounce but that bounce will fade as the reasons for the Fed pause, as in an earnings recession, take hold.” – David Rosenberg, founder and president of Rosenberg Research “As partly anticipated and hoped for, the FOMC suggested a possibly slower cadence for rate hikes going forward by explicitly acknowledging the lagged effect of the aggressive tightening to date on the economy and inflation, and the fact that the policy stance is now more materially restrictive. So the focus, while still on corralling inflation, is also starting to shift toward some concern about overdoing it and sending the economy into a tailspin. Bottom Line: Rates haven’t peaked, but we are likely getting closer to the end of this nasty tightening cycle. We currently look for another 50 bp increase in December and a final 25 bp jab in February, before the Fed moves to the sidelines.” – Sal Guatieri, senior economist at BMO Capital Markets”Despite recession risk factors largely stemming from rampant inflation, I predict the unemployment rate will remain below 4.5% in the second half of 2022, serving as reassurance for the Fed to continue with hikes as planned. We could see rates rise to above 4% by the end of the year, making the federal interest rate the highest it has been since 2007. The terminal fed funds interest rate, or neutral rate, could reach 5% in late 2023 before falling back to 2.5% later in 2024 if full employment persists and prices stabilize.” – Steve Rick, chief economist at CUNA Mutual Group”The FOMC statement was much more dovish than we could have ever imagined. Specifically, the Fed is going to evaluate how much they should raise in the future, taking into account that when they hike rates, there is a lag in the economic data. That was extremely dovish which we haven’t seen before. So that was good. It looks like the Fed is nearing the end of its rate hike cycle. I suspect they also have some political pressure because what they are doing is not going to help the party in power right now. Nevertheless, it looks like the Fed will be winding down its interest rate increases. I think December will be the last rate increase.” – Louis Navellier, chairman and founder of Navellier & Associates”The FOMC statement was similar to the last meeting except for the part that says ‘In determining the pace of future increases in the target range, 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.’ They will have a conversation about the pace of tightening with the POSSIBILITY of smaller hikes as soon December BUT IT WILL BE DATA DEPENDENT. This was not a pivot.” – John Luke Tyner, portfolio manager and fixed income analyst at Aptus Capital Advisors”For the Fed to really pivot, and not just slow rate hikes, they will want to see slower total and core inflation, pullbacks in house prices and rents, slower wage growth, lower job openings, and likely an increase in the unemployment rate to be convinced that the slowdown in inflation that is expected in 2023 does not give way to another jump higher in 2024.” – Bill Adams, chief economist at Comerica Bank”The FOMC raised the funds rate target range by 0.75 pp at the November meeting, as widely expected. The post-meeting statement was updated to acknowledge the substantial cumulative tightening of monetary policy and the likely further drag it will impose on the economy. We view these changes as a signal that the Committee is leaning toward slowing the pace of tightening to 50 bp at the December meeting.” – Jan Hatzius, chief economist and head of Global Investment Research at Goldman Sachs”Two words, ‘cumulative’ and ‘lags’ spark rally in stocks and bonds. The Fed gives investors hope that the pace of rate increases are slowing by mentioning that they will be considering the cumulative impact of rate increases as well as taking into account that there is a time delay between when rates are increased and when the economy begins to be significantly altered by those rate increases.” – Bryce Doty, senior portfolio manager and vice president at Sit Investment Associates”Recap: More, but less, is the message the Fed is trying to portray as more hikes are needed, but possibly at a slower pace. For now, the Fed has reiterated the status quo in that the main objective is to see ‘evidence’ of inflation slowing, but the reality is they have to start accounting for the inherent lag that occurs between monetary policy decisions and its effect on the economy. Our Take: With some uncertainty remaining in the path of inflation going forward, Powell and the committee are trying to balance the optionality of further tightening against the work that has already been done. This does not change the fact that they want to implement a policy plan that is restrictive enough to slow the economy. Monitoring the incoming data over the coming months will ultimately determine how high policy rates have to go, but a slowdown in the pace of tightening seems appropriate at this juncture. At this point in the hiking cycle, it appears as if the Fed is getting closer to moving towards an observatory role as they assess the impacts of the policy tightening that has been completed.” – Charlie Ripley, senior investment strategist for Allianz Investment Management”Markets were hoping for a more explicit acknowledgement that the Fed might be near the end of the tightening cycle, at least ITS MOST AGGRESSIVE phase. This didn’t quite happen, although the Fed included a key sentence that will keep this hope alive: it was careful to point out that they remain very dependent on incoming data. In determining the pace of future increases in the target range, 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. Markets will continue to probe on this front and hope that if not this time, the Fed may well pivot next time. This is good because it shows the economy is cooling off faster than perhaps the Fed had assumed. The time between the last hike and first cut is usually not very long: 9 to 12 months. If the above relationship is right, this time should be no different. It’s reasonable to expect the first cut to happen late in 2023 or at the latest by Q1 2024.” – Jan Szilagyi, CEO and co-founder of Toggle AI