Statement

The two-day FOMC meeting concluded this afternoon. As expected, the Fed raised its overnight rate range by three-quarters of a point. This marks the fourth 0.75% increase in a row. The new range is now 3.75% to 4%. The Committee recognized that the war and inflation continue to weigh on economic activity. New sentences in the statement encouraged traders that the Fed is looking down the road to someday end this rate increase cycle. The last Fed meeting for the year will be over December 13 and 14. Futures contracts project the Committee to return to smaller half-point increases at that meeting. 

The statement added two new sentences. As usual, market participants can argue about their meaning. The first: “ ongoing increases in the target range will be appropriate in order to attain...policy… that is sufficiently restrictive to return inflation to 2%.” In other words, the Fed is not going to stop raising rates until the inflation rate moves lower.  

In the second new sentence, the Committee went on to give itself some wiggle room in how fast it raises rates: “In determining the pace of future increases…take into account…cumulative tightening, lags…affects economic activity and inflation.” So the Committee is finally acknowledging that rate increases take nine to 12 months to work their way through the economy. Traders also read into that sentence that the Fed may pause its rate increases in early 2023 to assess the impact of moving from 0% to above 4% in roughly one year’s time. 

Comment

Stocks and bonds briefly reacted positively to the statement. Once Chairman Powell started talking, cooler heads prevailed and moved the averages lower. We take the Fed at their word, they are not finished raising rates, the economy is getting weaker, and we should be ready for falling employment.

Chairman Powell continues to point out that long-term inflation expectations remain low. We are a bit mystified at this focus by the Fed, as they admit they do not have a good model of inflation. He also pointed out in his press conference that the ending interest rate in this cycle is “likely higher than many expect.” 

He also reminded listeners that this rate increase cycle may result in below-trend growth and lower employment. We would point out that “may” should be read as “will.” Powell emphasized “how high” and “how long” rates remain higher are more important than how fast the Fed gets to that level. 

Summary

October’s stock rally took fuel from the idea that the Fed may consider slowing or pausing its rate increases in 2023. Fed speakers were merely saying what their policy forecasts had shown for several quarters: that the rate of increases would slow next year. The idea that the Fed may pause next year is consistent with rate increases taking up to a year to filter through the economy. 

More importantly, the Fed has to be aware of the downturn in housing (over 40% drop) caused by their increases. The job market and employment remain strong, inflation, notably in diesel fuel and food, will remain higher longer than markets want.  

Thank you for trusting our team, and please let us know if you have any questions.

Steve Orr is the Executive Vice President and Chief Investment Officer for Texas Capital Bank Private Wealth Advisors. Steve has earned the right to use the Chartered Financial Analyst and Chartered Market Technician designations. He holds a Bachelor of Arts in Economics from The University of Texas at Austin, a Master of Business Administration in Finance from Texas State University, and a Juris Doctor in Securities from St. Mary’s University School of Law. Follow him on Twitter here. 

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