The stock market rejoiced after the 0.75% rate hike on November 2. However, the uptick seen in the stock prices appeared to be temporary once Fed Chief Powell started his post-conference commentary on the monetary policy. As far as tightening measures were concerned, the reality set in with pessimism making a comeback.
Two important takeaways from Powell’s commentary were – One, as a message for the doves, he suggested that the central bank may consider slowing down the pace of rate hikes, and secondly, for the hawks, the message was that the terminal Fed Funds Rate may end up at a higher level than what has been expected so far.
Powell said, “At some point, as I’ve said in the last two press conferences, it will become appropriate to slow the pace of increases as we approach the level of interest rates that will be sufficiently restrictive to bring inflation down to our 2% goal. There is significant uncertainty around that level of interest rates. Even so, we still have some ways to go, and incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected.”
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UBS holds the view that the Federal Reserve Chair Powell’s communication has confused markets. A slower pace of rate hikes with a hint that tightening could slow before inflation fell dramatically seems dovish. But Powell also said that a higher terminal fed funds rate can be seen by the time inflation gets tamed. Markets eventually focused on the hawkish tone as the market was seen pricing in a terminal fed funds rate of 5.10%.
The whole talk about a Fed Pivot also seemed to have gone out-of-the window. José Torres, Senior Economist at Interactive Brokers says, “Powell expressed that it’s very premature to think about pausing rate hikes while also noting that a discussion of slowing the pace of rate hikes may be appropriate at the December or February meetings. He also noted that strength in the labor market and continued hot inflation readings bumped up the Fed’s expectations of the terminal rate or the peak of where the fed funds rate will end up during the current cycle. Expectations of future rate hikes quickly adjusted higher, with market participants now expecting the fed funds rate to remain at or around 5% through all of next year with a peak at 5.38%.”
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However, after the unexpected cooling down of inflation from September’s 8.2% to 7.7% (annual rise) in October, the markets will look for other signs of strength now to end the year on a positive note.