EconoFACTS

November 21, 2023 | 15:10

Fed Data Driven While Mindful of the Risks

Economist

Deputy Chief Economist and Managing Director
Economics

Michael is part of the team responsible for forecasting and analyzing the North American economy and financial m... (Read more)

Michael Gregory , CFA

Deputy Chief Economist and Managing Director
Economics

Michael is part of the team responsible for forecasting and analyzing the North American economy and financial m... (Read more)

At its October 31-November 1 confab, the FOMC left policy rates unchanged (as was widely expected) but tweaked the statement. The economic assessment was upgraded to “strong” from “solid” in recognition of real GDP’s 4.9% annualized gain in Q3. But the economic headwinds were also upgraded. The statement said: “Tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation.” The “financial” reference was new, in recognition of the ripple effect of the rise in bond yields (at the time).

Apart from these offsetting alterations, there were no other meaningful changes. In the presser, Chair Powell said the Fed is “proceeding carefully”, making policy decisions “meeting by meeting, based on the totality of the incoming data and their implications for the outlook for economic activity and inflation as well as the balance of risks”. Released today, the Minutes showed that all participants agreed with Powell’s comments.

Since the meeting, the economic indicators have donned a decidedly weakening-growth, ebbing-inflation tone and bond yields have backed down (by more than 45 bps at the 10-year tenor). What will the Fed make of these developments heading into its next confab in three weeks? We scoured the Minutes for clues; we didn’t find many.

Importantly, “participants expected that the data arriving in coming months would help clarify the extent to which the disinflation process was continuing, aggregate demand was moderating in the face of tighter financial and credit conditions, and labor markets were reaching a better balance between demand and supply.” Despite the above-mentioned tone to the indicators, with labour demand hitting a cycle high in September and the latest CPI data showing “limited progress in bringing down inflation in core services excluding housing”, more ‘clarifying’ data would appear to be required.

As for the subsequent drop in bond yields, the Minutes mentioned (as Powell also did) that “it was uncertain whether this tightening of financial conditions would persist and to what extent it reflected expectations for tighter policy or other factors.” So, it seems this factor isn’t being given full weight in the Fed’s reaction function just yet. Besides, even after recent declines, bond yields remain elevated by recent historical standards.

Finally, participants “generally judged” that the risks surrounding the outlook were now “more two sided”, necessitating the ‘careful’ approach to policy going forward. Careful basically means that the bar to raise rates has been lifted, but there’s still a bar even if it's now meaningfully higher.