At today’s Federal Open Market Committee (FOMC) meeting, the Federal Reserve (Fed) chose to keep the benchmark policy rate on hold at 5.25%-5.50% for a second consecutive meeting. Analysts had been almost unanimously expecting no change to rates today, so the decision comes as very little surprise to the market. Yet, following the stream of strong economic data, tentative evidence of decelerating disinflation, as well as the very significant rise in bond yields, investors were very keen to hear Chair Powell’s assessment of current conditions.

Current economic assessment

Since the last FOMC meeting in September, economic activity has remained very strong. Not only was Q3 GDP growth an “outsized” 4.9%, but payroll gains reversed their previous downward trend, and solid retail sales growth has continued unabated. Inflation has also surprised slightly to the upside, with several indicators tentatively suggesting a slowdown in the pace of inflation deceleration.

Chair Powell welcomed the economic resilience, but his press conference was littered with concerns that the strong economy may mean that policy is not yet sufficiently restrictive to return inflation to 2%. He noted that cooling inflation requires a period of below-trend growth and softening labor market conditions—in other words, the FOMC does not believe in the concept of immaculate disinflation and, as a result, the Fed is keeping the door open to further hikes.

Financial conditions assessment

The surge in bond yields, with 10-year U.S. Treasury yields hitting 5% last week, has caught both the market’s attention and the Fed’s. At a recent speech to the Economics Club of New York, Chair Powell had noted that “persistent changes to financial conditions can have implications for the path of monetary policy,” and several Fed speakers have gone so far as to explicitly say that the recent rise in long-term interest rates may reduce the need to raise policy rates.

Inevitably, then, the question of tightening financial conditions dominated the press conference. Powell acknowledged that the run-up in bond yields had delivered a tightening in financial conditions, which is likely to weigh on the economy (he repeatedly referred to the rise in mortgage rates as an example of this tightening). While this presumably does some of the work for the Fed, Powell noted that they still needed to evaluate how persistent the rise in yields is, as well as identify what is driving rates higher.

Indeed, the reason behind the rate move is important: If rates are rising due to rising policy rate expectations, the Fed would likely need to follow through with rate hikes or risk a renewed easing in financial conditions, threatening their inflation target. However, if rates are rising due to concerns about the size of the deficit and increased bond issuance, the tightening in financial conditions would be more persistent, and the Fed would likely consider rising yields as a substitute for additional hikes.

Other important points from Powell during the press conference

  1. Powell said that if the Fed keeps rates unchanged in December, that does not necessarily close the door to further hikes in 2024. Essentially, they are not pre-committing to a path and will take each meeting as it comes.
  2. At this time, the FOMC is not considering rate cuts at all.
  3. The committee also isn’t discussing any change in the pace of balance sheet run-off.
  4. Nobody really knows where the neutral rate is.
  5. Monetary policy lags are unclear, but one area yet to feel the impact of tighter monetary policy is corporate debt due to the maturity profile. But “it will come.”


Taking a big step back and analyzing the situation, were it not for the bond yield spike, the recent strength of economic data would likely have warranted an additional policy rate hike today. Powell’s comments reinforced that view: Recent economic strength keeps the door open to rate hikes, but the rise in bond yields may be doing the work for the Fed—they just aren’t sure yet.

Perhaps the main takeaway is that although the Fed may be weighing up an additional hike, they are clearly nearing the end of their tightening cycle. Although the FOMC may not be talking about it today, within a few months, the question will no longer be “Will they hike again?” but “When will they cut?”

Macro views

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