The US Federal Reserve maintained a funds rate of 5.25–5.5 per cent at its latest Federal Open Market Committee (FOMC) meeting on Wednesday (1 November).
This was the second consecutive FOMC pause verdict since the commencement of a monetary policy tightening cycle in March 2022, which involved 500 bps in cumulative rate hikes.
The Fed’s decision buoyed the US share market, with the Dow Jones Index rallying 0.67 per cent on Wednesday in what has been a strong week for equities.
This comes amid growing evidence of sustained disinflation and renewed hope for a soft landing following an extended period of restrictive monetary policy.
Inflationary pressures eased beyond market expectations over the three months to 30 September 2023, with the latest consumer price index (CPI) rising just 0.4 per cent, down from 0.6 per cent in August.
Inflation eased to just 3.7 per cent in annualised terms after hitting a peak of 9.1 per cent in June 2022.
At the same time, the US economy remains resilient, as affirmed by an upside surprise in the latest GDP data.
The US economy grew 4.9 per cent in the 12 months to 30 September – the fastest growth since the fourth quarter of 2021 and well above market forecasts of 4.3 per cent.
In the post-meeting statement on monetary policy, FOMC members referenced these latest economic trends, adding the labour market has also “moderated” and credit conditions have tightened.
In his post-meeting press conference, Fed chair Jerome Powell also acknowledged the impact of higher long-term US Treasury bond yields.
According to James Knightley, chief international economist at ING Economics, higher bond yields have been doing the Fed’s work.
“The surprise surge in longer-dated Treasury yields and the tightening of financial conditions it’s prompted will inevitably create more headwinds for activity in an environment where mortgage and car loan rates are already above 8 per cent and credit card interest rates are at all-time highs,” he said.
“With Treasury yields staying at elevated levels, the need for further policy rate hikes is dramatically reduced and we do not expect any further Fed rate hikes.”
But the FOMC left the door open to future firming, noting it would continue to monitor developments in the financial market.
“The committee will continue to assess additional information and its implications for monetary policy,” the FOMC members noted.
“In determining the extent of additional policy firming that may be appropriate to return inflation to 2 per cent over time, 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.”
“…In assessing the appropriate stance of monetary policy, the committee will continue to monitor the implications of incoming information for the economic outlook.”
The FOMC went on to stress that it would be prepared to action further hikes to the funds rate “if risks emerge”.
“The committee’s assessments will take into account a wide range of information, including readings on labour market conditions, inflation pressures and inflation expectations, and financial and international developments.”
But according to Mr Knightley, the federal funds rate has hit its peak and may be heading south next year to revive the economy from a recession.
“Consumer spending remains the most important growth engine in the economy, and with real household disposable income flatlining, savings being exhausted and consumer credit being repaid – and this is before the recent tightening of lending and financial conditions is fully felt – means we see the primary risk being recession,” he said.
“If right, this will depress inflation pressures even more rapidly than the Fed is anticipating, giving it the scope to cut policy rates in the first half of next year.”
However, Fed chair Jerome Powell told the media cuts were not on the central bank’s agenda.
“We’re not talking about rate cuts,” he stressed.
“We’re still very focused on the first question, which is, have we achieved a stance of monetary policy that’s sufficiently restrictive to bring inflation down to 2 per cent?”