Fed Gives No Hints of Future Rate Cuts, Wall Street Remains Cautious

UTC by Bhushan Akolkar · 4 min read
Fed Gives No Hints of Future Rate Cuts, Wall Street Remains Cautious
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Fed Chair Jerome Powell said that the FOMC is not thinking of rate cuts at all amid their continued fight against inflation. The FOMC members have hinted deceleration in economic growth during he fourth quarter this year.

During their latest meeting, Federal Reserve (Fed) officials indicated a reluctance to reduce interest rates in the near future. This is especially true considering the persistent inflationary pressures exceeding their target, as revealed in the released minutes on Tuesday, November 21.

The summary of the meeting, conducted from October 31 to November 1, highlighted the ongoing concerns among Federal Open Market Committee members regarding the possibility of sustained or elevated inflation, signaling a potential necessity for further actions.

They emphasized that policy measures should remain “restrictive” until there is compelling evidence of inflation returning convincingly to the central bank’s 2% target. In their released minutes, the FOMC members stated:

“In discussing the policy outlook, participants continued to judge that it was critical that the stance of monetary policy be kept sufficiently restrictive to return inflation to the Committee’s 2 percent objective over time.”

The minutes also show that the FOMC members believe that they could “proceed carefully” and make decisions “on the totality of incoming information and its implications for the economic outlook as well as the balance of risks”.

Fed Remains Tight-Lipped on Rate Cuts

Analysts on Wall Street believe that the Federal Reserve has concluded its tightening cycle. Traders in the fed funds futures market are expressing almost no likelihood of further rate hikes in this cycle. In fact, they are anticipating rate cuts to commence in May. Overall, the market envisions that the Federal Reserve will implement the equivalent of four quarter-point cuts before the conclusion of 2024.

However, the US central bank has given no such indications. “The fact is, the Committee is not thinking about rate cuts right now at all,” said Fed Chair Jerome Powell. In a meeting against the backdrop of concerns about surging Treasury yields, the Federal Reserve opted to maintain its benchmark funds rate within the range of 5.25% to 5.5%, marking the highest level in 22 years.

The discussion, which occurred on November 1, coincided with the Treasury Department’s announcement of its borrowing requirements for the coming months, revealing figures slightly below market expectations. Post-meeting, yields have retreated from 16-year highs as the market grapples with the impact of substantial government borrowing and speculations about the Fed’s future rate actions.

Officials assessed that the increase in yields was driven by mounting “term premiums”, denoting the additional yield demanded by investors for holding longer-term securities. The meeting minutes highlighted policymakers’ perception that the growing term premium resulted from increased supply due to the government addressing its substantial budget deficits. The discussions also delved into the Fed’s monetary policy stance, along with perspectives on inflation and economic growth.

Slowdown in Economic Growth

During discussions, officials anticipated a notable deceleration in economic growth in the fourth quarter following the robust 4.9% increase in gross domestic product (GDP) recorded in the third quarter. Assessing the risks, they noted that broader economic growth faces a potential downside, while risks to inflation are tilted to the upside.

Regarding current policy, members acknowledged its restrictive nature, exerting downward pressure on economic activity and inflation, according to the meeting minutes. Public statements from Fed officials have reflected a divergence of opinions, with some advocating for a pause to evaluate the impact of the 11 previous rate hikes, totaling 5.25 percentage points, on the economy, while others advocate for additional increases.

Economic data has presented a mixed picture, generally supporting inflation trends. The Fed’s key inflation indicator, the personal consumption expenditures price index, revealed core inflation running at a 3.7% 12-month pace in September, showing improvement from May but still exceeding the Fed’s target. Some economists anticipate challenges in reducing inflation, given strong wage increases and persistent elevations in components such as rent and medical care.

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