Jerome Powell and his Federal Reserve colleagues delivered the widely expected hold to the US base rate at 5.25% – 5.5% last night, but as usual the accompanying commentary was of greater note.
Powell indicated that although inflation has come down fast to the 3% area and a pause in hikes is warranted, the Fed still plans to raise once more before the end of 2023.
He also indicated that once the projected peak rate of 5.5% to 5.75% is reached, it could stay there for some time to ensure there is no resurgence of inflation.
Whether this turns out to simply be rhetoric designed to stop markets and consumers becoming too exuberant, or turns into reality, is far from certain.
Jim Cielinski, global head of fixed income at Janus Henderson, commented: “The Federal Reserve chairman Jay Powell stuck to the script by reiterating that an additional rate hike remains on the table and should progress in reducing inflation. Having upwardly revised its economic growth projections, the Fed had little choice but to also raise its expected trajectory for policy rates, as expressed in its Dots survey.
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“With the market having moved toward the Fed’s more hawkish rates trajectory, we believe the front-end of yield curves provide opportunities for attractive yield generation, as do segments of the market that more fully reflect a slowing economy.”
Salman Ahmed, global head of macro and strategic asset allocation at Fidelity International, said: “As expected, the FOMC decided to not raise rates at its September meeting and retained the hawkish formulation of its forward guidance by retaining the statement that “additional policy firming may be appropriate”.
“Much more significantly, however, were the moves in the Summary of Economic Projections, which showed that the committee’s expectations for where interest rates will go in 2024 rose from 4.6% at the June meeting, to 5.1% today. Taken together with their updated expectations for core inflation in 2024, which held steady at 2.6%, brings the committees expectation for where real rates will land in 2024 up by 50bps to 2.5%.
“At the press conference, Powell underlined the hawkishness of the committee’s projections, whilst retaining maximum optionality to let the data dictate where they go next. He stressed that the committee is waiting to be convinced that inflation is sustainably down, whilst noting that they ‘need to be confident that we are at an appropriately restrictive stance’. This aligns with our view that the focus of the committee is shifting from emphasising ‘higher’ to ‘longer’, and corroborates our view that the hurdle for pivoting is still very high.”
Alexandra Wilson-Elizondo , deputy CIO, multi-asset strategies at Goldman Sachs Asset Management, noted the unexpectedly hawkish tone.
“We, like many, expected to see the hawkish hold that Powell nodded to at Jackson Hole,” she said. “However, the release was more hawkish than expected. While a share of past policy tightening is still in the pipeline the Fed can go into wait and see mode, hence the pause.
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“However, the main risk remains tarnishing their largest asset, anti-inflation credibility, which warrants favouring a hawkishness reaction function. Most likely, the recent rise in energy prices and resilient consumption and activity data drove the higher median dot in 2024.
“We don’t see a singular upcoming bearish catalyst, although strikes, the shutdown, and the resumption of student loan repayments collectively will sting, and drive bumpiness in the data between now and their next decision. As a result, we believe that their next meeting will be live, but not a done deal.”
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