Proceeding carefully

Federal Reserve Chair Jerome Powell is not a carpenter or tailor, but he and fellow policymakers seem to be abiding by the adage “measure twice, cut once.” Not that they plan on cutting rates anytime soon, but that they want to get another look at economic data before even entertaining the idea of ending the tightening campaign. 

In his press conference following the FOMC meeting today, Powell frequently called this “proceeding carefully,” citing it as the reason the committee left the fed funds target range unchanged at 5.25-5.50%. It’s the second time this year it has foregone a hike, the first being in June, with a quarter-point bump coming in July. The next chance is the meeting on Nov. 1.

While it is plausible we have already seen the last rate hike of this cycle, the Summary of Economic Projections published today suggests not. This is most visible in the new dot plot, in which 12 out of 19 participants still forecast an additional 25 basis-point rate hike by year-end. Furthermore, the projected fed funds rate for the next two years was notched up by 50 basis points to a median 5.1% for 2024 and 3.9% for 2025. That reinforces the high-for-longer theme been embraced by the market in recent weeks.

The current stance of monetary policy is inarguably restrictive, but whether enough so is uncertain. That’s why Powell wants to lay the measuring tape on a few weeks more of data before committing to what could well be the inflection point, even if rates could remain elevated for some time. With several headwinds—the lagged impact of previous hikes, the United Auto Workers strike, a potential government shutdown, the resumption of student loan payments, higher oil prices and more—we think the Fed’s caution is appropriate.

Quantitative tightening continues on autopilot, with the Fed continuing to shrink its balance sheet by $95 billion per month. It kept the rate on the New York Fed Reverse Repo Facility and Interest on Reserves unchanged at 5.30% and 5.40%, respectively.