Fed’s ‘Hawkish Pause’ to Keep Option to Hike
The Federal Reserve is poised to hold interest rates steady at a 22-year high for a second meeting, while leaving open the possibility of another hike as soon as December with economic growth staying resilient.
Powell has signaled that Fed leaders would prefer to wait to evaluate the impact of past increases on the economy as they near the end of their rate-hiking campaign. With inflation still well above the committee’s 2% target and the economic growth rate near a two-year high, policymakers want to retain the option to move again.
“It will be kind of a hawkish pause,” said Thomas Simons, senior economist at Jefferies LLC. “The economy is doing well and inflation hasn’t gotten to target yet. They more or less have to continue to say we may need to raise rates one more time.”
What Bloomberg Economics Says…
“The Fed will hold rates steady at the Oct. 31-Nov. 1 FOMC meeting, a second consecutive pause. Still, we expect the policy statement and Fed Chair Jerome Powell’s comments to leave the door open to further hikes. Whether the extended pause will turn into a definitive end to the hiking cycle will hinge on labor and inflation data over the next few months.”
— Anna Wong, Stuart Paul, Eliza Winger and Estelle Ou. For the full note, click here
Surging US Treasury yields have contributed to a tightening of financial conditions, which a number of Fed officials said could make it less necessary to raise rates this meeting. Deutsche Bank AG, for example, estimates the recent surge could be the equivalent to as many as three quarter-point Fed rate hikes.
That’s led even more hawkish members of the FOMC, including the Dallas Fed’s Lorie Logan and Governor Christopher Waller, to indicate they would be patient in making rate moves.
No dissents are expected.
The committee may tweak the language describing the recent economy, reflecting the 4.9% growth rate in the past quarter and continued solid job gains. The FOMC could also acknowledge recent tightening of financial conditions, which Fed officials have highlighted in recent speeches. No change in guidance is expected.
“In general, the bias is for as little change as possible,” said Ellen Meade, a former senior adviser to the Fed board and a research professor at Duke University. “The first paragraph will likely be revised to acknowledge the strength of the incoming data: labor market, inflation, GDP growth.”
Powell has highlighted elevated geopolitical tensions, following the Israel-Hamas war, and the FOMC may discuss whether to include this as a risk in its statement as well.
Market reaction to the FOMC might be muted: The decision is well anticipated and investors have been focused on the US fiscal deficit, so the Treasury refinancing announcement might overshadow the Fed Wednesday.
“Almost the bigger event on Wednesday is going to be the refunding announcement in the morning,” Simons said.
Powell will be pressed by reporters on whether he agrees with the committee’s forecasts from September, when it penciled in another hike by year’s end. He could say that future hikes depend on the incoming data and that monetary policy works with a lag, so the full effect of higher interest rates hasn’t yet been felt in the economy.
Powell will “leave a quarter point on the table, but it’ll be kind of half-hearted,” said Vincent Reinhart, the chief economist at Dreyfus and Mellon who previously spent more than two decades working at the Fed. “He expects more credit constriction to the banking system, but appreciates that takes time. He thinks there is more to come and being patient is fine.”
The chair is likely to be asked to explain why a recent pickup in growth and above-target inflation didn’t prompt a hike. His press conference may echo themes from an Oct. 19 speech to the Economic Club of New York, where he said additional hikes would depend on the data, outlook and balance of risks.
“Powell has to walk the line he did two weeks ago,” Meade said. “Their first mission is to bring inflation back to 2% and they aren’t giving up. They might have to go higher but they might be done, with a lean into the possibility of going higher so market participants don’t misinterpret.”