November 23, 2022 | 14:31
FOMC Minutes (Nov 2): A "Substantial Majority" Says Slow It Down
We all remember that November 2nd FOMC meeting. The central bank raised the Fed funds rate by 75 bps (four in a row) to the 3.75%-to-4.00% target range, which was fully expected. The Statement gave a subtle hint of a slower pace of rate hikes to come by inserting the line that the FOMC 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". Well, that did it. Markets rallied on the more encouraging sign that the pain of aggressive rate hikes may be in the rearview mirror.
Fed Chair Powell then took the podium and single-handedly changed the mood, using phrases such as how "there is still ground to cover" to get to terminal, and that it is "very premature to be thinking about pausing... we have a ways to go on rates... and the ultimate level of rates will be higher than previously expected".
So why the discrepancy, between the seemingly 'dovish' Statement and the 'hawkish' remarks? That's where the Minutes come in handy and if you were just watching the 10-year Treasury without reading the headlines, you would figure out what the underlying message was. The benchmark 10-year was hovering around 3.75% beforehand, and it slipped to 3.70% after the release.Of course there were some mixed views, both for and against slowing the pace of rate hikes. For example, "a few participants" felt that a slower pace could reduce risks to the financial system, while "a few other participants" felt that they should hold off on the slower pace until there were "more concrete signs that inflation pressures were receding significantly".
Some other observations to note:
So, it's complicated. But the key phrase that one should take note of was "substantial majority". Specifically, "... a substantial majority of participants judged that a slowing in the pace of increase would likely soon be appropriate." Slowing the pace would give the FOMC the ability to assess the economic landscape and see where they're at in terms of meeting their objectives.
That settles the pace. (And looks like St Louis Fed Pres Bullard is really in the minority.) But what is terminal? When will the Committee stop? Again, it's complicated. "Many participants commented that there was significant uncertainty about the ultimate level of the federal funds rate...." But given that inflation is still very sticky, even after all of this time, the fed funds rate would be "somewhat higher than they had previously expected", which is what Fed Chair Powell said during that press conference.
Bottom Line: Short of some wild inflation report before the next meeting, 50 bps sounds very reasonable in December. But the Fed is clearly not finished yet. To quote other officials around the globe, the decision will be data-dependent and be made on a meeting-by-meeting basis. That sounds reasonable too.