Fed holds rates steady while noting tighter financial conditions
Summary
On Wednesday, November 1, 2023, the Federal Open Market Committee (FOMC) voted unanimously to hold the fed funds rate at a target range of 5.25%–5.50%. Today's pause represents consecutive FOMC meetings with no rate change, having hiked in 11 out of the last 14 prior meetings. The most notable change to the FOMC statement was a reference to tightening financial as well as credit conditions, suggesting the Committee is beginning to see the effects of restrictive monetary policy. That said, Powell highlighted strong GDP growth in the U.S. economy of late, supported by a robust labor market. He noted in particular that the supply of labor has increased — supported by immigration levels which have returned to pre-pandemic levels — but labor demand still exceeds the supply of available workers.
Source: CME FedWatch Tool
Impact on rates
While the economic comments could be viewed as hawkish, Powell's comments surrounding uncertainty over one additional previously anticipated rate hike — along with the general tightening of financial conditions — led the market to view Powell's overall sentiment as dovish. As such, expectations of additional Fed rate hikes this year fell significantly following the meeting, as the market sees the Fed balancing the strong labor market against increasingly tighter financial conditions.
Two-year swap rates have fallen roughly 30 basis points since peaking in mid-October, with roughly 15 of those basis points falling in the aftermath of today's FOMC meeting. That said, long-term rates remain elevated relative to prior FOMC meetings, with 10-year yields roughly 40 basis points higher than the prior FOMC meeting (despite also falling today). While short-term rates represent market expectations of the Fed, the more elusive long-term rates garnered attention in the post-Fed press conference. The Fed’s quantitative tightening — along with higher risk premia — were cited as potential drivers of higher long-term rates.
Moving forward
In a tone consistent with prior meetings, Chair Powell was resolute regarding the Fed’s focus on reducing inflation to its 2.00% target. While Powell noted that the Committee was not confident in financial conditions being restrictive enough to bring inflation down, he reiterated that they will take a meeting-by-meeting approach. He explicitly stated that the Committee doesn’t see a recession in the "near-term," given strong GDP growth in the third quarter, but also referenced prevailing uncertainty including Federal government budget talks and global geopolitical conflicts.
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