Wait and see
The Fed wants more time and data as it looks to December's meeting.
Patience may be a virtue, but investors have little choice following today’s Federal Reserve policy-setting meeting. It again left rates unchanged in the 5.25-50% range, pushing the fate of its inflation-fighting campaign to at least December. "Given how far we have come along with the uncertainty and risks we face, the committee is proceeding carefully," said Chair Jerome Powell. The beleaguered central bank seems finally to have caught a break, with two factors aiding its cause and buying it time.
First, the bond market is doing the Fed a favor with its ferocious backup in yields from the belly of the yield curve outward. In theory, this acts like policy tightening as it discourages borrowing, business planning and a host of reactions that could dampen activity. However, Powell said policymakers want to see if the tighter financial conditions continue and don't think the rise in long-term yields is due to near-term shifts in policy expectations.
Then there’s the economy itself, a case study in mixed signals. As stunning as the September jobs report was with an addition of 336,000 jobs—the largest monthly gain since January—temporary help fell, household employment barely rose and two other labor-market reports (ADP and Challenger) were weak.
Likewise, a consumer-fueled jump in third-quarter GDP growth of 4.9%—the biggest gain since the fourth quarter of 2021—has been tempered by mediocre manufacturing reports, poor affordability for homebuyers and vanishing corporate spending.
Most important, of course, is inflation, which continues to repel the Fed’s aggressiveness. The two main measures remain well above the 2% target: the core Personal Consumption Expenditures and core Consumer Price Index had annualized rates of 3.7% and 4.1%, respectively, in September. All told, we think the December FOMC meeting is an active one, meaning a quarter-point hike is possible. More data releases and a new Summary of Economic Projections should provide clarity. If the Fed forgoes action, we can’t rule out a hike in 2024.
With the GOP finally electing its speaker in the House of Representatives, we can turn our focus to … more turmoil. Specifically, the potential for a federal government shutdown on Nov. 17, the date the short-term extension from October ends. While new Speaker Mike Johnson has made avoiding one a priority, it certainly could happen. As a reminder, a government shutdown has little impact on the markets because the issuance and repayment of U.S. debt obligations are considered essential, so they continue as usual. Also, these affairs typically end quickly.
The Treasury Department released its quarterly refunding plans this week. Increases to auction sizes for coupon securities out the yield curve were a little smaller than anticipated. All told the Treasury intends to auction $112 billion in coupon securities next week to meet financing needs. The supply of Treasury bills is expected to remain robust, although the Dept. may modestly reduce auction sizes in December.
Another sign of the potency of money market funds came when the Investment Company Institute (ICI) reported in mid-October that weekly U.S. money fund assets had plummeted by $98.8 billion. That drop was only eclipsed in size during the Global Financial Crisis. So why didn’t this make headlines and shock investors? Partially because the decline was due to large tax payments by a few states and the long-awaited closing of the Microsoft/Activision deal. But the foremost reason was that it amounted to only around 2% of a record total of more than $5.700 trillion in money fund assets across the industry due to the massive inflows during the Fed tightening. You know you are doing well when billions of dollars is negligible. As if to prove the point, the industry quickly bounced back as assets ended the month at $5.633 trillion.