November 01, 2023 | 15:19
FOMC Announcement — Keeping Policy Cards Close to Chest
The FOMC left policy rates unchanged today, as was broadly expected. The target range for the fed funds rate remains at 5.25%-to-5.50%. In the statement, “strong” replaced “solid” in describing current economic activity, a meaningful upgrade, but this was countered by the mention of both “tighter financial and credit conditions” as weighing on future economic activity. Before, only tighter credit conditions was mentioned, in a new nod to higher bond yields.
Elsewhere, September’s forward guidance was repeated (which had been in place for the prior three meetings). It says: “In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, 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.” As we’ve mentioned before, the “may be appropriate” phrase affords the Fed a lot of flexibility. It fit July’s hike, along with September’s and November’s skips and, thus, it can accommodate the possibility of either action at the next meeting.
In the presser, Chair Powell’s opening comments sounded like his remarks made a couple of weeks ago, so no new insights. In the Q&A, in discussing the policy implications of higher bond yields, he said that two things matter. First, whether the move is proving to be persistent and, second, whether the move reflects higher term premiums and not market expectations for ‘higher-for-longer’ policy rates (he judges it is more term premiums).
Bottom Line: The Fed served few clues about potential policy actions on December 13 or January 31. In the presser, Powell even avoided saying the Fed had a formal “tightening bias”. In its self-described meeting-by-meeting approach, the Committee will assess whether it has achieved sufficiently restrictive monetary policy. The Fed judges it’s not there yet, but financial conditions are working to steer them in that direction. We'll see where this lands by mid-December, after a couple iterations of key data.