The Federal Reserve elected to not raise the federal funds rate for a second consecutive meeting, and the third time in 2023.
For the second consecutive meeting, and the third time in the last four meetings, the Fed elected to hold the federal funds rate steady at its October/November FOMC meeting. The unanimous decision keeps the fed funds rate at the current 5.25%-5.50% target range, which remains the highest mark in over 20 years.
“Fed Chair Jerome Powell painted a picture of an economy in transition from ‘strong’ growth to deceleration. The question is how quickly and to what extent will restrictive policy slow the economy?” said Raymond James Chief Investment Officer Larry Adam.
The Fed wants to keep its options open and follow the upcoming data to see how the economy unfolds, but key points noted are that the strong third quarter (+4.9% GDP) of economic momentum and the Fed’s September ‘dot plot’ of suggesting one additional rate hike are likely to ‘decay’ over time.
“If the Fed can navigate the economy to avoid a recession and the prospects for further tightening are reduced, with the market now only estimating a ~27% probability of a hike by the January meeting, the equity and fixed income markets should benefit,” said Adam.
“A few months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably towards our goal. The process to getting inflation sustainably down to 2%, has a long way to go,” said Powell. “We are strongly committed to returning inflation to our 2% target.”
Following a 10-meeting stretch of rate hikes that began in March 2022, the Fed has elected to raise rates just once (25 bps in July) since June. There’s been a total increase of 100 bps in 2023, a stark contrast to the 425 bps of hikes in 2022.
“The Fed acknowledged the strong pace of economic activity during the third quarter, but also indicated that job gains have moderated compared to earlier in the year, which likely refers to the benchmark revisions to nonfarm payroll numbers rather than to the latest monthly releases, which showed a still strong labor market. The Fed also acknowledged that the rate of unemployment has remained low while inflation has remained elevated,” said Raymond James Chief Economist Eugenio Alemán.
Investors will have to wait until the December 12-13 FOMC meeting to get further insight into the Fed’s path forward, as the updated Summary of Economic Projections (SEP) and dot plot will be released during that time.
“The process of bringing inflation down sustainably to the 2% range is still a long way in the future, and should strong economic and employment conditions remain, it could push the Fed to increase the federal funds rate in the coming months,” said Alemán.
All expressions of opinion reflect the judgments of the Raymond James Chief Investment Officer and Raymond James Chief Economist and are subject to change.
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