03 Nov FED WAS FIRST VIEWED WITH A DOVISH TILT…
As expected the FOMC increased the overnight rate by 75 basis points to a targeted range of 3.75% to 4.0%
Furthermore, The Committee anticipates “ongoing increases” in borrowing costs but added “in determining the pace of future increases in the target range, 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.”
The statement was interpreted as the bulk of the rate increases may be behind us. My comment…rates have gone up logarithmically from 0.00% to 4.0% in seven months. The market is suggesting a “terminal rate” of around 5% in 2023 which is only 25% higher than where the rate is currently targeted.
FRB Chair Powell did indicate a December increase is assured but the magnitude of that rate hike is in question stating, “the time to down shift to a slower pace of hikes may come as soon as the next meeting or the one after that.”
Wall Street applauded the apparent dovish transition, but this transition was short lived following Powell’s later statement “We have some ways to go,” which was interpreted that the ultimate level of the terminal rate may be higher than previously expected.
I rhetorically ask is Powell attempting to squelch inflationary expectations. The Central Bank is adamant in its view that the inflationary speed limit is 2.0%, and the Fed Funds rate must equal the inflation rate in the intermediate future.
Equities first rallied on the outcome of the Fed meeting and then sold off decidedly on the “some ways to go” quote. The NASDAQ was hit hardest…down 3.36%. The Dow declined about 1.55%.
Treasuries also reversed direction, ending higher in yield across the curve.
Nominally changing topics but perhaps of significant buried in the statement is that the Federal Reserve will continue to reduce it holdings of Treasuries and mortgage-backed securities as planned—a pace amounting to about $1.1 trillion a year.
A question that may soon become of some relevance is who will and what interest rate will it take to buy this debt? Approximately $1.78 trillion of Treasuries must be purchased in 2023. [$1 trillion budget deficit plus $780 billion of Treasury sales/roll offs by the Fed]
Tomorrow is the release of October’s employment data. How will the statistics be released?
Last night the foreign markets were down. London was down 0.55%, Paris down 0.82% and Frankfurt down 1.16%. China was down 0.19%, Japan down 0.06% and Hang Seng down 3.08%.
Dow and NASDAQ futures are down 0.4% and 1.0%, respectively as China reaffirmed its zero COVID policy and from the renewed belief that the “terminal rate” for Fed Funds may be around 5.1%. The 10-year is off 22/32 to yield 4.20%.