FOMC says rate hikes are working but more expected

Jobs and housing markets showing no signs of cooling

Speaking at the Economic Club of Washington, Chair Powell stated the disinflationary process had only just begun. He cited the robust jobs market as the leading indicator that further rate hikes were necessary to slow the economy and rein in inflation within the Fed's acceptable threshold. The sentiment was shared by Federal Reserve Governor Christopher Waller and President of the Federal Reserve Bank of Minneapolis Neel Kashkari, who both stated that further rate hikes should be expected. President Kashkari cited 5.4% as an appropriate holding threshold. This did not come as a surprise following the better-than-expected jobs numbers released last week. The U.S. economy added 517,000 jobs in January while November and December figures were revised up to 290,000 and 260,000, respectively. The unemployment rate has now reached its lowest point since 1969. Concurrently, mortgage rates continued to fall from their November 2022 peak with new mortgage and refinancing applications up 18% week over week. Chair Powell indicated that the housing sector had been least affected by the disinflationary process and will likely be a key indicator for The Fed’s ongoing effort.

Neighbors following suit

The Fed is not alone in its efforts to walk the fine line and stick to the ideal soft landing. Its North American counterparts, the Bank of Mexico (Banxico) and the Bank of Canada (BoC), have struggled to rein in their own inflation, with the former raising its key benchmark rate 25 basis points this week and the latter considering further rate hikes after its own higher-than-expected jobs report was released. Banxico had raised its benchmark 650 basis points since June 2021 while the BoC’s rate of 4.5% is the highest seen since the 2008 financial crisis.

Most analysts agree with Chair Powell’s comments that 2023 will see a significant decline in inflation; the sticking point is how fast the disinflation will occur. The Q4 Federal Reserve Dot Plot Target Rate Projections, published as of December 12, 2022, illustrates a tapering off of rate hikes sometime in 2023 with the caveat that these projections are contingent on a cooling jobs market. February will serve as a turning point. Markets expect a sharp decline in inflation, which has already been factored into interest rate expectations. The Fed, on the other hand, expects inflation to linger and could drive the market to reassess current exposures and be in lockstep with the Fed. Next on the market watch calendar is the Consumer Price Index (CPI) data for January, which is set to be released on February 14. If the inflation numbers miss Fed expectations, this could prompt the broader FOMC to revise current projections upwards in its March 22 meeting to align with President Kashkari. Should this happen, rates will most likely rise as well, driving up the cost of hedging for corporations.