Fed Sends Mixed Messages After Hiking Rates

The Federal Reserve sent out mixed messages after its November FOMC meeting leaving markets wondering just how much more the central bank will tighten monetary policy.

As expected, the Fed delivered another 75 basis point rate hike, pushing the Fed funds rate to between 3.75 and 4%. The last time interest rates were this high was in January 2008.

The markets had already priced in the November rate hike. The anticipation all centered on Fed’s messaging. Would the central bank signal a pivot away from tightening? Or would it remain committed to increasing rates even as the economy has become shaky?

The messaging that came out of the Fed meeting was anything but definitive.

The official FOMC statement signaled additional hiking.

 The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.”

But it also left some wiggle room for a slowdown in hiking or even a pause with language about monetary policy “lags” and “cumulative” effects.

In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”

As Peter Schiff said in a tweet, “By acknowledging the lag between rate hikes and inflation, the Fed gave itself the leeway to pause. Also, the Fed’s commitment to returning inflation to 2% over time does not indicate how much time it will take.”

The markets read the FOMC statement the same way. The Dow Jones initially jumped about 300 points.

But in his post-meeting press conference, Federal Reserve Chairman Jerome Powell tempered that optimism, and his remarks were widely viewed as hawkish.

To sum it up, Powell said, “It is very premature to be thinking about pausing.” He also indirectly noted the higher-than-expected October CPI, saying, “Incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected.”

Powell’s tough talk immediately threw cold water on the stock market rally. The Dow closed down over 500 points.

Schiff tweeted:

#Powell just threw cold water on the idea of a pause in interesest rate hikes, causing an immediate, and sharp sell-off in financial markets. The sell-off will likely continue until Powell "clarifies" his remarks to prevent the #stock and #bond markets from crashing to new lows.

— Peter Schiff (@PeterSchiff) November 2, 2022

Powell did back off a little as he answered questions, and he even said a slowing of rate hikes could come as early as the December meeting.

As we come closer to that level and move further into restrictive territory, the question of speed becomes less important. … And that’s why I’ve said at the last two press conferences that at some point it will be important to slow the pace of increases. So that time is coming, and it may come as soon as the next meeting or the one after that. No decision has been made.”

Powell acknowledged the slowing economy and conceded that the path to a “soft landing” is “narrowing.”

We’ve always said it was going to be difficult, but to the extent rates have to go higher and stay higher for longer it becomes harder to see the path. It’s narrowed. I would say the path has narrowed over the course of the last year.”

Powell said he would prefer to overtighten to knock out inflation because it would be easier to use its tools to stimulate the economy if it weakens too much. Schiff tweeted that”Powell doesn’t get it.”

Planned rate hikes and QT will only succeed in crashing the economy, not bringing down inflation.”

As far as balance sheet reduction goes, the FOMC statement said it would “continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve’s Balance Sheet that were issued in May.”

The problem with this statement is that it has only met its monthly reduction goal one time over the last five months.

In a nutshell, while last week the Fed seemed to be setting up for a soft pivot, Powell decided to go the more ambiguous route at the November meeting. Regardless, it is only a matter of time before the economy comes crashing down. That’s when the central bank will have to choose its path.