Last Wednesday at 2 PM EST, when many traders were attempting to be the Thanksgiving Day traffic and many of those who remained were engrossed in the World Cup, the Federal Reserve released the minutes from the November FOMC meeting. Equity markets responded positively, seizing once again on potentially hopeful sentences in the press release. Yet it shows how investors have continually reduced their expectations for what might provide a meaningful change to Fed policy.
These sentences, from page 9 of the pdf version, seemed to be the ones that best captured the market’s attention:
A number of participants observed that, as monetary policy approached a stance that was sufficiently restrictive to achieve the Committee’s goals, it would become appropriate to slow the pace of increase in the target range for the federal funds rate. In addition, a substantial majority of participants judged that a slowing in the pace of increase would likely soon be appropriate.
Even though the Fed continues to view raising rates as a necessary tool for combatting inflation, the Open Market Committee recognizes that they will want to slow the pace of rate hikes. On its face, this is clearly welcome news. Few want to see the Fed continuing to raise rates by ¾% at each meeting.
But few expected the FOMC to keep raising rates at their recent pace anyway. Fed Funds futures have been pricing a 50bp hike for the December meeting even before November. That’s a slower pace. Futures currently imply rates peaking at 5% in June. While that is down from a peak of about 5.15% in the immediate aftermath of the November meeting, it is largely unchained from the pre-meeting estimate of 5.03%. In other words, the idea of slowing the pace of rate hikes is not exactly new news.
But this is what hopeful investors have come to see as good news from the Fed. After the July meeting, there were widespread hopes for a “pivot” – that the Fed would reverse its rate hikes in relatively short order. Those hopes were dashed rather unequivocally by Chairman Powell at Jackson Hole. So then investors began hoping that rates would peak in the short-term. Clearly not, as the Fed raised rates aggressively at the last two meetings, and as we noted in the minutes above, they remain committed to further hikes in upcoming meetings – just smaller. Somewhere along the way there were hopes that the Fed would pause their hiking cycle to see if their previous measures were having the desired effect. Again, there is nothing in the minutes that indicates that they will be pausing their rate hikes anytime soon.
So, with a pivot, peak rates and a pause all off the table at the moment, it seems that investors will settle for a slower pace of rate hikes. Markets have seriously downgraded their what constitutes hopeful expectations from the Federal Reserve. I suspect that this is more reflective of the generally complacent mood in equity markets over recent weeks – note VIX’s recent flirtation with the 20 level – than a realistic hope for a friendly Fed.
And by the way, the minutes referred to the “Plans for Reducing the Size of the Federal Reserve’s Balance Sheet that were issued in May” at least four times. Quantitative tightening will be continuing at its predetermined pace for the foreseeable future. Perhaps it’s best to not remind Fed optimists about that right now.
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