There was no surprise from Jerome Powell in regard to FED’s decision. We have a fourth 75bp interest rate increase in a row, bringing the cumulative policy tightening to 375bp since March and the Fed funds target range up to 3.75-4%, in what was a unanimous decision.

However, there are some major changes to the statement and Jerome Powell’s press conference that suggest we will see a “step down” in the size of rate hikes in the future, but a possibly „higher” end point for interest rates.

The Fed continues to “anticipate that ongoing increases in the target range will be appropriate”, adding that hikes will continue until they achieve a “stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time”.

But there is an important caveat in that “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.”

This suggests that they’ve done a lot of work already and it may be time to take things a little slower.

This is a key shift that had been signaled by Fed Governor Chris Waller and San Francisco Fed President Mary Daly in October, the latter who has suggested back then that the Fed is „thinking about a step down [in the pace of hikes], but we’re not there yet„.

That said, it is important to emphasise that does not mean rate hikes are going to stop soon.

Chair Powell in the press conference highlighted an important distinction between the pace of rate hikes and what will be the ultimate, or terminal, rate level. Indeed, he commented that the Fed doesn’t want to fail to tighten enough and loosen too soon.

Market scales back hikes, but extends duration
Right now, financial markets seem to be thinking the Fed is indeed signaling the prospect of slower paced hikes and a slightly lower terminal rate.

Futures markets are pricing in around 120bp of additional Federal Reserve interest rate increases from here, having been pricing 125bp immediately ahead of the decision.

About 57bp is priced for mid-December, 38bp priced for early February 2023 and 18bp priced for the March 22nd FOMC meeting with 8bp for May. The chances are currently favouring 50bp in December and 50bp in February and calling that the top.

With the courtesy of ING Bank N.V. as copyright owner