Like last August, those expecting a “dovish pivot” from Jerome Powell at the Fed's monetary policy meeting last week got their money's worth.
However, despite the new, unsurprising 75 bps increase in key rates, the fourth "jumbo" increase in a row, the Fed's final press release mentioned a new paragraph which was rather well received by investors, who had become true exegetes of the slightest writing of the American institution. Iindeed, for the first time, the FOMC announced that it would henceforth take into account in the future pace of rate hikes, the gap that exists between the monetary tightening already carried out and its impact on economic activity and the inflation. In other words, rate hikes will continue at a slower pace in order to better understand the consequences of the tightening of financial conditions and thus avoid taking too many steps. It was enough for the market to see in this addition the long-awaited “dovish pivot”. But, as in August during the Jackson Hole symposium, Jerome Powell came to shower the hopes of investors during the press conference.
Indeed, not only did the Chairman of the Fed explicitly indicate that this paragraph did not constitute the premises of a pivot, but he also held a resolutely hawkish speech, arguing that the inflationary context had become increasingly difficult, which necessitated an even more restrictive monetary policy and reduced, de facto, the path to a soft landing for the economy. For the members of the FOMC, the tightening of monetary conditions is still having a limited impact on inflation, with a job market and household consumption showing signs of resilience. Jerome Powell also took advantage of the press conference to specify more clearly the monetary policy to come. FOMC members must therefore answer three questions when deciding on monetary policy: (i) the speed of future increases, (ii) the terminal level of Fed funds and (iii) the duration of the restrictive monetary policy. On point (i), and according to the new paragraph, the “jumbo” hikes are probably behind us, implying more limited hikes in the future. On point (ii), the Fed clearly seems to be feeling its way. The only certainties are that the terminal rate is above the current 4% and will probably be raised above 5% in the FOMC projections. Finally, (iii) on the last question, this will probably be the new midpoint for 2023 since once the terminal level is reached, the Fed could decide to maintain it for some time to guarantee a return of inflation towards the 2% target. From there to anticipating that key rates will not be lowered in 2023… there is only one step!
Investors are therefore no further ahead after this new Fed meeting. If, as expected, the pace of rate hikes slows down, the terminal rate will depend on future data and the duration of the restrictive policy is the new unknown in the equation for next year.