Higher for how much longer? “The extent of additional policy firming that may be appropriate….”
By Wolf Richter for WOLF STREET.
The FOMC voted unanimously to keep its five policy rates unchanged today, with the top of its policy rates at 5.50%, as had been broadly messaged in recent weeks in speeches by Fed governors. It was the second meeting in a row when the Fed kept rates unchanged, after the rate hike at its meeting in July. The Fed has hiked by 525 basis points so far in this cycle.
Today, the Fed kept its policy rates at:
Federal funds rate target range between 5.25% and 5.5%.
Interest it pays the banks on reserves: 5.4%.
Interest it pays on overnight Reverse Repos (RRPs): 5.3%.
Interest it charges on overnight Repos: 5.5%.
Primary credit rate: 5.5% (what banks pay to borrow at the “Discount Window”).
Higher for how much longer?
The end of the rate hikes is typically followed by plateaus before rate cuts begin. The end of the rate hikes may not be here yet, and the Fed has already said a gazillion times for months that the plateau is going to be “higher for longer.”
More rate hikes? Today’s meeting was one of the four meetings a year when the Fed does not release a “Summary of Economic Projections” (SEP), which includes the infamous “dot plot” which shows how each FOMC member sees the development of future policy rates.
At the last meeting on September 20, the median projection in the “dot plot” kept another rate hike on the table for this year. There was nothing in today’s statement that changes that.
Today’s statement repeated the language of the prior statements, which leaves the door open for more rate hikes:
“In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, 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.”
When will the rate cuts start? The Fed will release its next SEP and “dot plot” at the December meeting. In the SEP released in December 2022, the Fed shocked the world because it removed the projections of a rate cut in 2023. In the SEP released in September, the Fed moved the rate cuts further out into the second half of 2024, which was another shocker. So the next SEP in December will be interesting.
QT continues, with the Treasury roll-off capped at $60 billion per month, and the MBS roll-off capped at $35 billion a month, as per plan and on autopilot. The Fed has already shed over $1 trillion in assets in a little over a year, and this will continue.
Banking crisis copy-and-paste. Today’s statement repeats the same language about the banking crisis for the fourth meeting in a row: That the “tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation.” And it repeats that “the extent of these effects remains uncertain.”
I will publish my analysis of Powell’s preconference, and his own words, in a little while. Stay tuned.
My take on the Quarterly Refunding documents released today: The spike of the 10-year Treasury yield has apparently rattled the government’s nerves. Tsunami of Treasury Issuance Shifts from Longer-Term Debt to Short-Term T-Bills & 2-Year Notes amid Intense Navel-Gazing about Spiking 10-Year Yield
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