Has The Fed Hit a Turning Point?

After two years of aggressive rate hikes to combat inflation, the Federal Reserve is on the cusp of a significant policy shift. This Wednesday’s meeting marks a turning point, with a pause on rate increases and a focus on what lies ahead. While the immediate decision is anticipated, the subtle nuances of the Fed’s statement, economic projections, and Chair Powell’s press conference hold the key to understanding the future trajectory of monetary policy.

A Pause in the Rate Hike Cycle:

The Federal Open Market Committee (FOMC) is virtually certain to hold the benchmark overnight borrowing rate steady at a range of 5.25% to 5.5%. This decision reflects the Fed’s recognition of the recent slowdown in inflation, as evidenced by Tuesday’s Consumer Price Index report showing core inflation at a 4% annual rate. The aggressive rate hikes have had their intended effect, and the Fed is now in a position to assess the impact and determine the next course of action.

Shifting Narrative: From Hiking to Cutting?

While the pause is a significant development, the Fed’s communication will provide further insights into their future plans. Economists anticipate subtle changes in the post-meeting statement, such as dropping the reference to “additional policy firming” and focusing on achieving the 2% inflation target. These changes would signal a shift in the narrative from focusing on rate hikes to considering potential cuts in the future.

The closely watched dot plot, which reflects individual members’ expectations for future interest rates, will also be scrutinized. The removal of the previously indicated rate increase for this year is expected, but the market’s anticipation of rate cuts starting in May 2024 might be perceived as overly aggressive. Most economists believe the Fed will take a more cautious approach, with cuts likely to materialize in the second half of 2024 or later.

Economic Outlook and the Real Rate:

Alongside the policy decision, the Fed will update its projections for economic growth, inflation, and unemployment. While significant changes are not anticipated, these projections will provide valuable information about the current state of the economy and the Fed’s expectations for the future.

The real rate, or the difference between the fed funds rate and inflation, is also a key factor in the Fed’s deliberations. Currently, the real rate stands at 1.8%, significantly above the neutral rate of 0.5%. This high real rate is considered restrictive, meaning it is slowing down economic activity. Chair Powell’s comments will be closely watched for any hints about how the Fed might balance the need to control inflation with the potential for slowing economic growth.

Powell’s Press Conference: Clues for the Future:

The press conference following the meeting will be the most anticipated event of the week. Chair Powell’s remarks will be analyzed for any clues about the Fed’s future plans. While Powell is likely to remain cautious, his comments could provide valuable insights into the Fed’s thinking and their views on the economic outlook.

Markets are eagerly anticipating any indication of a dovish pivot, which could lead to a further surge in equity prices. However, Powell may also address concerns about the recent loosening of financial conditions, emphasizing the Fed’s commitment to achieving their inflation target. Striking a balance between these competing concerns will be a major challenge for Powell and the FOMC.

Looking Ahead: A Cautious Path Forward

The Federal Reserve’s Wednesday meeting marks a significant turning point in their fight against inflation. While the immediate pause in rate hikes is expected, the future trajectory of monetary policy remains uncertain. The Fed will closely monitor the economic data and adjust their policy as needed. The coming months are likely to be characterized by careful consideration and cautious action as the Fed navigates the complex task of balancing inflation control with economic growth.

This article has highlighted the key details of the upcoming Fed meeting and its potential impact on the economy and financial markets. By understanding the nuances of the Fed’s communication and the challenges they face, we can gain a deeper understanding of the future of monetary policy and its implications for businesses, consumers, and investors alike.

Powell Pumps the Brakes on Rate Cut Hopes

Federal Reserve Chair Jerome Powell threw cold water on mounting speculation that the central bank is nearing the end of its tightening campaign and will soon reverse course to cutting interest rates.

In a speech at Spelman College on Friday, Powell asserted “it would be premature” for investors to conclude the Fed’s policy stance is restrictive enough given lingering inflation pressures. He stated plainly that more rate hikes could still be on the table if appropriate.

His sobering comments follow the latest inflation data showing core PCE, the Fed’s preferred gauge, ticked down slightly to 3.5% annually in October. Though marking a fourth consecutive month of slow improvement, Powell emphasized the number remains well above the Fed’s 2% target.

“While the lower inflation readings of the past few months are welcome, that progress must continue if we are to reach our 2% objective,” he said.

Nonetheless, overeager investors have jumped the gun on declaring victory over inflation and penciling in imminent rate cuts. Billionaire Bill Ackman predicted this week that cuts could come as soon as Q1 2024.

But Powell asserted the full impact of the Fed’s blistering pace of rate hikes this year has likely not yet transmitted through the economy. Plus, he noted core PCE has averaged 2.5% over the past six months – still too high for comfort.

Key Takeaways for Investors

The Fed chair’s remarks make clear that policymakers see their inflation-taming mission as incomplete despite markets cheering each new downward tick. Here are the big implications for investors:

  • Rate cuts are not coming anytime soon. The Fed wants concrete evidence that inflation is reverting steadily to its 2% goal before it contemplates easing policy. Powell admission that more hikes could happen dispels investor hopes for a swift policy pivot.
  • Stocks may face renewed volatility. Exuberant bets on imminent rate cuts provided major tailwinds for this year’s risk asset rebound. With the Fed dampening that narrative, investors may recalibrate positions. Powell cautioned about the unusual uncertainty still permeating the economic outlook.
  • Recession risks linger in 2024. The full brunt of the Fed’s Super-Size rate hikes has yet to impact the real economy. Powell made clear policy will stay restrictive for some time to have its intended effect of slowing demand and consumer spending. That keeps recession risks on the radar, especially in the back half of next year.

Navigating the Volatility Ahead

With the Fed determined to remain the grinch raining on investor enthusiasms around pivots, next year promises more turbulence for markets. Savvy investors should:

Trim exposure to interest-rate sensitive assets: Risks remain heavily skewed towards more volatility as the Fed asserts its hawkish credibility. ratchet down exposure to bonds, utilities, real estate and other rate-vulnerable sectors.

Emphasize inflation hedges: The Fed’s clear-eyed focus on returning inflation to 2% means investors should still prioritize inflation-fighting assets like commodities, TIPS, floating-rate bank loans, and short-duration bonds. These provide buffers against rising prices.

Stay nimble amid cross-currents: Between lingering inflation and slowing growth, crosswinds for investors abound. Being opportunistic yet disciplined will be critical, as risk appetites could sour quickly depending on upcoming data and guidance from the Fed. Maintaining flexibility and even selective hedges allows investors to adeptly navigate the turbulence ahead under Powell’s resolute hawkish watch.

Inflation Edges Higher in October but Shows Ongoing Signs of Cooling

New government data released Thursday indicates that inflation ticked slightly higher in October but remained on a broader cooling trajectory as price pressures continue moderating from 40-year highs reached earlier this year. The report provides further evidence that the rapid pace of price increases may be starting to steadily decelerate, supporting the Federal Reserve’s recent inclination to halt its aggressive interest rate hike campaign.

The Fed’s preferred inflation gauge, the core personal consumption expenditures (PCE) price index, rose 0.2% last month and 3.5% over the past year. This matched consensus economist forecasts. The core PCE index strips out volatile food and energy costs to provide a clearer view underlying price trends.

While still well above the Fed’s 2% target, the annual increase was down from 5.3% in February. The incremental monthly gain showed prices climbing at a more restrained pace after an intense burst earlier this year.

“The Fed is on hold for now but their pivot to rate cuts is getting closer,” said Bill Adams, chief economist at Comerica Bank. “Inflation is clearly slowing.”

Markets are already betting policymakers won’t hike rates again this cycle, and may even start cutting in 2024 to bolster growth as price pressures continue easing. The latest data provides credibility to the idea that the Fed’s rapid rate hikes since March, which have raised its benchmark to a 15-year high, have begun achieving their intended effect of reining in demand and cooling the economy enough to tame inflation back toward manageable levels.

Still Cautious on Further Easing

However, Fed officials stressed that rates will still need to remain at restrictive levels for some time to ensure inflation continues descending toward the central bank’s 2% target.

New York Fed President John Williams said Thursday he expects inflation to keep drifting lower, finally hitting the Fed’s goal by 2025. But he emphasized rates will likely need to stay elevated until then to completely quell price pressures.

Other Fed policymakers also struck a cautious tone on prematurely ending rate hikes before inflation is convincingly on a path back towards the 2% goal. Many noted that while price increases may be peaking, inflation remains stubbornly high and consumer demand continues holding up more than feared despite rapid rate rises this year.

Moderating Labor Market Could Allow Rate Cuts

There were some early signs in Thursday’s data that the torrid job market may also finally be cooling slightly after persisting at unsustainable levels through much of the year.

The report showed continuing jobless claims climbed to 1.93 million in mid-November, their highest mark since November 2021. The number of Americans applying for ongoing unemployment benefits has risen by more than 80,000 since October.

While still historically low, the increase could provide Fed officials confidence that their rate hikes have begun not only slowing demand and price growth, but also easing excessively tight labor market conditions they have said contributed to rapid wage and inflation surges.

An easing job market that reduces wage pressures could give the Fed leeway next year to shift their priority toward sustaining growth and cut rates to spur a slowing economy, especially as other inflationary pressures subside.

Consumers Keeping Pace For Now

On the growth side, the report showed some signs of resilience among consumers even in the face of elevated inflation and rising borrowing costs.

Personal income and consumer spending both edged up 0.2% in October, indicating households are so far keeping pace with rising prices digging into their paychecks. Services like travel and healthcare saw particularly solid spending last month.

Surveys show consumers remain relatively upbeat thanks to still-ample savings and solid income growth. But many Fed officials have noted anecdotally that households appear to be pulling back spending more than aggregate data indicates so far. Any sharper-than-expected deceleration in consumer demand would give policymakers leeway to pivot toward supporting growth.

Eyes on Services Inflation

Some economists noted that while goods prices have cooled sharply from peaks last year amid improving supply issues, services costs remain stubbornly high for now as resilience in consumer demand combined with rising wage growth enables firms to pass higher labor expenses to customers.

“Inflation is moderating with goods prices leading the charge,” said economist Nancy Vanden Houten of Oxford Economics. But she said core services costs actually ticked up in October, bearing monitoring to ensure price stability as the economy shifts more toward services consumption over goods.

With strong income gains and accumulated savings still underpinning spending for now, officials emphasized rates may need to stay higher for longer to ensure the progress made on easing price pressures sticks.

“I expect it will be appropriate to maintain a restrictive stance for quite some me to fully restore balance and to bring inflation back to our 2 percent longer-run goal on a sustained basis,” said the New York Fed’s Williams on Thursday.

Fed Signals No Rate Cuts Coming Despite Recession Fears

Despite growing fears of an impending recession, the Federal Reserve is showing no signs of pivoting towards interest rate cuts any time soon, according to minutes from the central bank’s early-November policy meeting.

The minutes underscored Fed officials’ steadfast commitment to taming inflation through restrictive monetary policy, even as markets widely expect rate cuts to begin in the first half of 2024.

“The fact is, the Committee is not thinking about rate cuts right now at all,” Fed Chair Jerome Powell asserted bluntly in his post-meeting press conference.

The summary of discussions revealed Fed policymakers believe keeping rates elevated will be “critical” to hit their 2% inflation target over time. And it gave no indication that the group even considered the appropriate timing for eventually lowering rates from the current range of 5.25-5.50%, the highest since 2000.

Despite investors betting on cuts starting in May, the minutes signaled the Fed intends to stand firm and base upcoming policy moves solely on incoming data, rather than forecasts. Officials stressed the need for “persistently restrictive” policy to curb price increases.

Still, Fed leaders acknowledged they must remain nimble in response to shifting financial conditions or economic trajectories that could alter the monetary path.

Surging Treasury Yields Garner Attention

This balanced posture comes after the early-November gathering saw extensive debate around rapidly rising Treasury yields, as 10-year rates hit fresh 15-year highs over 4.3%.

The minutes linked this upward pressure on benchmark yields to several key drivers, including increased Treasury issuance to finance swelling federal deficits.

Analysts say the Fed’s aggressive rate hikes are also forcing up yields on government bonds. Meanwhile, any hints around the Fed’s own policy outlook can sway rate expectations.

Fed participants decided higher term premiums rooted in fundamental supply and demand forces do not necessarily warrant a response. However, the reaction in financial markets will require vigilant monitoring in case yield spikes impact the real economy.

Moderating Growth, Elevated Inflation Still Loom

Despite the tightening already underway, the minutes paint a picture of an economy still battling high inflation even as growth shows signs of slowing markedly.

Participants expect a significant deceleration from the third quarter’s 4.9% GDP growth pace. And they see rising risks of below-trend expansion looking ahead.

Nevertheless, on inflation, officials suggested hazards remain tilted to the upside. Price increases slowed to a still-high 7.7% annual clip in October per CPI data, but stickier components like rents and services have been slower to relent.

The Fed’s preferred PCE inflation gauge has also moderated over recent months. But at 3.7% annually in September, it remains well above the rigid 2% target.

Considering lags in policy impacts, the minutes indicated Fed officials believe the cumulative effect of 375 basis points worth of interest rate hikes this year should help restore price stability over the medium term.

Markets Still Misaligned with Fed’s Outlook

Despite the Fed’s clear messaging, futures markets continue to forecast rate cuts commencing in the first half of 2023. Traders are betting on a recession forcing the Fed’s hand.

However, several Fed policymakers have recently pushed back on expectations for near-term policy pivots.

For now, the Fed seems inclined to stick to its guns, rather than bowing to market hopes or economic worries. With inflation still unacceptably high amid a strong jobs market, policymakers are staying the course on rate hikes for the foreseeable future, according to the latest minutes.

Millions of Gig Workers May Be Missing from Monthly Jobs Data

Each month the U.S. Labor Department releases its closely-watched jobs report, providing key employment statistics that the Federal Reserve monitors to gauge the health of the economy. However, new research suggests these monthly figures may be significantly undercounting workers, specifically those in the rising “gig economy.”

Economists estimate the undercount could range from hundreds of thousands to as many as 13 million gig workers. This discrepancy suggests the labor market may be even tighter than the official statistics indicate, allowing more room for employment growth before hitting problematic levels of inflation.

Gig Workers Slip Through the Cracks

Gig workers, such as Uber drivers, freelancers, and casual laborers, often don’t consider themselves part of the workforce or even “employed” in the traditional sense. As a result, when responding to government labor surveys, they fail to identify themselves as active participants in the job market.

Researchers Anat Bracha and Mary Burke examined this response pattern by comparing informal work surveys with standard employment surveys. They uncovered a troubling gap where potentially millions of gig workers get missed each month in the jobs data.

For the Fed, Underestimating Tightness Raises Risks

For the Federal Reserve, accurate employment statistics are critical to promoting its dual mandate of stable prices and maximum employment. If the labor market is tighter than the data suggests, it could force Fed policymakers to act more aggressively with interest rate hikes to ward off inflationary pressures.

An undercount means the economy likely has more remaining labor supply before hitting problematic levels of inflation-fueling tightness. With more Americans able to work productively without triggering price hikes, the Fed may not need to cool off the job market as quickly.

Implications for Fed Policy Decisions

In recent years, the Fed has dramatically revised its estimates for full employment to account for the lack of rising inflation despite ultra-low unemployment. Recognizing millions more gig workers could further adjust views on labor market capacity.

According to the researchers, the uncounted gig workers indicate the economy has had more room to grow without excessive inflation than recognized. As a result, they argue the Fed’s benchmark for tight labor markets could be revised upwards, allowing for less aggressive rate hikes.

Gig Workforce Expected to Expand Post-Pandemic

The gig economy workforce has swelled over the past decade. But the COVID-19 pandemic triggered massive layoffs, confusing estimates of its true size.

As the economy rebounds, gig work is expected to continue expanding. Younger generations show a preference for the flexibility of gig roles over traditional 9-to-5 employment. Moreover, companies are incentivized to hire temporary contract laborers to reduce benefit costs.

Accurately capturing this crucial and expanding segment of the workforce in monthly jobs data is necessary for the Fed to make informed policy moves. The research highlights an urgent need to refine labor survey approaches to avoid missteps.

Adapting Surveys to Evolve with the Economy

Government surveys designed decades ago need to adapt to reflect the rapidly changing nature of work. Respondents should be explicitly asked whether they engage in gig work and probed on their monthly hours and earnings.

Modernizing measurement approaches could reveal a hidden bounty of untapped labor supply and productivity from gig workers. With more accurate insight into true employment levels, the Fed can better balance its dual goals and promote an economy that benefits all Americans.

Powell Hints at Potential for More Rate Hikes

Federal Reserve Chair Jerome Powell doused investor hopes of a near-term pause in interest rate hikes, stating “we are not confident that we have achieved such a stance” that would allow inflation to drift down towards the Fed’s 2% target.

In remarks at an International Monetary Fund event, Powell said bringing inflation sustainably down to 2% still has “a long way to go”. His tone cast serious doubt on market expectations that the Fed is almost done raising rates in this cycle.

Traders have priced in a greater than 90% chance of just a 25 basis point December hike, followed by rate cuts commencing in mid-2023. But Powell stressed the Fed stands ready to tighten policy further if economic conditions warrant.

Powell acknowledged recent positive developments, including moderating inflation readings, strong GDP growth, and improvements in supply chains. However, he noted it is unclear how much more progress supply-side factors can drive.

That puts the onus on the Fed to ensure slowing demand prevents inflation from reaccelerating. Powell made clear the Fed will stay the course, even if that means defying market hopes for a dovish pivot.

How High Could Rates Go?

Markets are currently priced for Fed Funds to peak under 5% after a quarter point December increase. But Powell’s insistence on not letting up prematurely raises the specter of a higher terminal rate.

If strong economic reports continue showing robust consumer spending and tight labor markets, the Fed may opt for 50 basis points in December. That would leave rates squarely in the 5-5.25% range, with more hikes possible in early 2023 if inflation persists.

Powell was adamant the Fed cannot be swayed by a few months of data, given the fickle nature of inflation. Premature rate cuts could allow inflation to become re-entrenched, requiring even more aggressive hikes down the road.

With Powell determined to avoid that scenario, investors may need to brace for interest rates cresting above current expectations before the Fed finally stops tightening.

Growth and Jobs Still Too Hot?

Behind Powell’s hawkish messaging is a still-hot economy that could be fueling inflation pressures beneath the surface. The U.S. unemployment rate remains near 50-year lows at 3.7%, with job openings still far exceeding available workers.

Meanwhile, GDP growth rebounded to a strong 2.6% rate in the third quarter, defying recession predictions. Consumer spending has remained remarkably resilient as well.

Powell recognizes the Fed may need to cool economic activity more meaningfully to align demand with constrained supply. That explains his lack of confidence on inflation without further rate increases.

Markets move lower after Powell cools pivot hopes

Stock indexes immediately turned lower following Powell’s remarks, with the Dow shedding around 200 points. Treasury yields also spiked as expectations for longer-term Fed hikes intensified.

Powell succeeded in resetting market assumptions, making clear the Fed has no intentions of reversing course anytime soon just because inflation has shown initial signs of improvement.

Until policymakers have high confidence lasting 2% inflation is in sight, Powell indicated the Fed’s tightening campaign will continue. That may disappoint stock and bond investors banking on rate cuts next year, but fighting inflation remains Powell’s top priority.

With the Fed Chair throwing cold water on pivot hopes, markets will likely undergo a reassessment of just how high the Fed may yet raise rates. Powell’s tone hints investors should brace for more tightening ahead, even if that delays the desired easing cycle.

Stocks Surge as End of Fed Hikes Comes Into View

A buoyant optimism filled Wall Street on Thursday as investors interpreted the Fed’s latest decision to stand pat on rates as a sign the end of the hiking cycle may be near. The Nasdaq leapt 1.5% while the S&P 500 and Dow climbed nearly 1.25% each as traders priced in dwindling odds of additional tightening.

While Fed Chair Jerome Powell stressed future moves would depend on the data, markets increasingly see one more increase at most, not the restrictive 5-5.25% peak projected earlier. The CME FedWatch tool shows only a 20% chance of a December hike, down from 46% before the Fed meeting.

The prospect of peak rates arriving sparked a “risk-on” mindset. Tech stocks which suffered during 2023’s relentless bumps upward powered Thursday’s rally. Apple rose over 3% ahead of its highly anticipated earnings report. The iPhone maker’s results will offer clues into consumer spending and China demand trends.

Treasury yields fell in tandem with rate hike expectations. The 10-year yield dipped under 4.6%, nearing its early October lows. As monetary policy tightening fears ease, bonds become more attractive.

Meanwhile, Thursday’s batch of earnings updates proved a mixed bag. Starbucks and Shopify impressed with better than forecast reports showcasing resilient demand and progress on cost discipline. Shopify even managed to eke out a quarterly profit thanks to AI-driven optimization.

Both stocks gained over 10%, extending gains for October’s worst sectors – consumer discretionary and tech. But biotech Moderna plunged nearly 20% on underwhelming COVID vaccine sales guidance. With demand waning amid relaxed restrictions, Moderna expects revenue weakness to persist.

Still, markets found enough earnings bright spots to sustain optimism around what many now view as the Fed’s endgame. Bets on peak rates mark a momentous shift from earlier gloom over soaring inflation and relentless hiking.

Savoring the End of Hiking Anxiety

Just six weeks ago, recession alarm bells were clanging loudly. The S&P 500 seemed destined to retest its June lows after a brief summer rally crumbled. The Nasdaq lagged badly as the Fed’s hawkish resolve dashed hopes of a policy pivot.

But September’s surprisingly low inflation reading marked a turning point in sentiment. Rate hike fears moderated and stocks found firmer footing. Even with some residual CPI and jobs gains worrying hawkish Fed members, investors are increasingly looking past isolated data points.

Thursday’s rally revealed a market eager to rotate toward the next major focus: peak rates. With the terminal level now potentially in view, attention turns to the timing and magnitude of rate cuts once inflation falls further.

Markets are ready to move on from monetary policy uncertainty and regain the upside mentality that supported stocks for so long. The Nasdaq’s outperformance shows traders positioning for a soft landing rather than bracing for recession impact.

Challenges Remain, but a Peak Brings Relief

Reaching peak rates won’t instantly cure all market ills, however. Geopolitical turmoil, supply chain snarls, and the strong dollar all linger as headwinds. Corporate earnings face pressure from margins strained by high costs and waning demand.

And valuations may reset lower in sectors like tech that got ahead of themselves when easy money flowed freely. But putting an endpoint on the rate rollercoaster will remove the largest overhang on sentiment and allow fundamentals to reassert influence.

With peak rates cementing a dovish pivot ahead, optimism can return. The bear may not yet retreat fully into hibernation, but its claws will dull. As long as the economic foundation holds, stocks have room to rebuild confidence now that the end is in sight.

Of course, the Fed could always surprise hawkishly if inflation persists. But Thursday showed a market ready to look ahead with hopes the firehose of rate hikes shutting off will allow a modest new bull run to take shape in 2024.

September Sees Record Lows in Home Sales

The US housing market continues to show signs of a significant downturn, with existing home sales in September dropping to the slowest pace since October 2010. This marks a 15.4% decline compared to September 2022, according to new data from the National Association of Realtors (NAR).

The sharp drop in home sales highlights how rising mortgage rates and declining affordability are severely impacting the housing market. The average 30-year fixed mortgage rate now sits around 8%, more than double what it was just a year ago. This rapid surge in borrowing costs has priced many buyers out of the market, especially first-time homebuyers.

Only 27% of September home sales went to first-time buyers, well below the historical norm of 40%. Many simply cannot afford today’s high home prices and mortgage payments. As a result, sales activity has fallen dramatically. The current sales pace of 3.96 million units annualized is down markedly from over 6 million just two years ago, when rates were around 3%.

At the same time, inventory remains extremely tight. There were just 1.13 million existing homes available for sale at the end of September, an over 8% decline from last year. This persistent shortage of homes for sale continues to put upward pressure on prices. The median sales price in September hit $394,300, up 2.8% from a year ago.

While higher prices are squeezing buyers, they are not denting demand enough to significantly expand inventory. Many current homeowners are reluctant to sell and give up their ultra-low mortgage rates. This dynamic is keeping the market undersupplied, even as sales cool.

Not all buyers are impacted equally by higher rates. Sales have held up better on the upper end of the market, while declining sharply for mid-priced and affordable homes. This divergence reflects that high-end buyers often have more financial flexibility, including the ability to purchase in cash.

All-cash sales represented 29% of transactions in September, up notably from 22% a year earlier. Wealthier buyers with financial assets can better absorb higher borrowing costs. In contrast, first-time buyers and middle-income Americans are being squeezed the most by rate hikes.

Looking ahead, the housing slowdown is likely to persist and potentially worsen. Mortgage applications are now at their lowest level since 1995, signaling very weak demand ahead. And while inflation has eased slightly, the Federal Reserve is still expected to continue raising interest rates further to combat it.

Higher rates mean reduced affordability and housing activity, especially if home prices remain elevated due to limited inventory. This perfect storm in the housing market points to significant headwinds for the broader economy going forward.

The housing sector has historically been a key driver of economic growth in the US. But with sales and construction activity slowing substantially, it may act as a drag on GDP growth in coming quarters. Combined with declining affordability, fewer homes being purchased also means less spending on furniture, renovations, and other housing-related items.

Some analysts believe the Fed’s aggressive rate hikes will ultimately tip the economy into a recession. The depth of the housing market downturn so far this year does not bode well from a macroeconomic perspective. It signals households are pulling back materially on major purchases, which could contribute to a broader economic contraction.

While no significant recovery is expected in the near-term, lower demand could eventually help rebalance the market. As sales moderate, competitive bidding may ease, taking some pressure off prices. And if economic conditions worsen substantially, the Fed may again reverse course on interest rates. But for now, the housing sector appears poised for more weakness ahead. Homebuyers and investors should brace for ongoing volatility and uncertainty.

Inflation Battle Goes On: Powell’s Reassuring Message from the Fed

Federal Reserve Chair Jerome Powell reiterated the central bank’s determination to bring down inflation in a speech today, even as he acknowledged potential economic risks from sustained high interest rates. His remarks underline the Fed’s unwavering focus on price stability despite emerging signs of an economic slowdown.

While noting welcome data showing inflation may be starting to cool, Powell stressed it was too early to determine a downward trend. He stated forcefully that inflation remains “too high”, requiring ongoing policy resolve from the Fed to return it to the 2% target.

Powell hinted the path to lower inflation likely entails a period of below-trend economic growth and softening labor market conditions. With jobless claims recently hitting a three-month low, the robust job market could exert persistent upward pressure on prices. Powell indicated weaker growth may be necessary to rebalance supply and demand and quell wage-driven inflation.

His remarks mirror other Fed officials who have suggested a growth sacrifice may be required to decisively curb inflation. The comments reflect Powell’s primary focus on price stability amid the worst outbreak of inflation in over 40 years. He admitted the path to lower inflation will likely prove bumpy and take time.

Powell stated the Fed will base policy moves on incoming data, risks, and the evolving outlook. But he stressed officials are united in their commitment to the inflation mandate. Additional evidence of strong economic growth or persistent labor market tightness could necessitate further rate hikes.

Markets widely expect the Fed to pause rate increases for now, after aggressively raising the federal funds rate this year from near zero to a current target range of 3.75%-4%. But Powell avoided any definitive signal on the future policy path. His remarks leave the door open to additional tightening if high inflation persists.

The speech underscores the Fed’s data-dependent approach while maintaining flexibility in either direction. Powell emphasized officials will proceed carefully in evaluating when to halt rate hikes and eventually ease monetary policy. The Fed faces heightened risks now of overtightening into a potential recession or undertightening if inflation remains stubbornly high.

After being accused of misreading rapidly rising inflation last year, Powell stressed the importance of policy consistency and avoiding premature pivots. A sustainable return to the 2% goal will require ongoing tight monetary policy for some time, even as economic headwinds strengthen.

Still, Powell acknowledged the uncertainties in the outlook given myriad economic crosscurrents. While rate hikes will continue slowing growth, easing supply chain strains and improving global trade could help counter those drags next year. And robust household savings could cushion consumer spending despite higher rates.

But Powell made clear the Fed will not declare victory prematurely given the persistence of inflation. Officials remain firmly committed to policy firming until convincing evidence demonstrates inflation moving down sustainably toward the target. Only then can the Fed safely conclude its aggressive tightening cycle.

For investors, Powell’s speech signals monetary policy will likely remain restrictive for some time, though the ultimate peak in rates remains uncertain. Markets should prepare for extended volatility as the Fed responds to evolving economic data. With risks tilted toward policy tightness, interest-sensitive assets could face ongoing pressure.

Investors Await Powell’s Speech for Cues on Future Rate Hikes

Federal Reserve Chair Jerome Powell is set to deliver a closely watched speech on Thursday before the Economic Club of New York that could offer critical guidance on the future path of monetary policy.

Markets are looking for clarity from Powell on how the Fed plans to balance improving inflation data against surging Treasury yields and risks of recession. His remarks come at a precarious time – inflation shows early signs of easing but remains well above the Fed’s 2% target, while rapidly rising interest rates threaten to slow economic growth.

Powell faces the tricky task of conveying that the Fed remains vigilant in combating inflation while avoiding cementing expectations for further aggressive rate hikes that could hammer markets.

“Powell has to present himself to investors as the dispassionate neutral leader and allow others to be more aggressive,” said Jeffrey Roach, chief economist at LPL Financial. “They’re not going to declare victory, and that is one reason why Powell is going to continue to talk somewhat hawkish.”

Cues from within the Fed have been mixed recently. Several officials, including Philadelphia Fed President Patrick Harker, have advocated holding fire on rate hikes temporarily to evaluate incoming data. This “wait and see” approach comes after a torrent of large rate increases this year, with the Fed Funds rate now sitting at a 15-year high of 3.75%-4%.

But hawkish voices like New York Fed President John Williams insist the Fed must keep policy restrictive for some time to combat inflation. Markets hope Powell will provide definitive guidance on the prevailing consensus within the central bank.

Policymakers are navigating a complex environment. Inflation data has been gradually improving from 40-year highs earlier this year. But inflation expectations remain uncomfortably high, pointing to the need for further tightening.

“Powell has to present the recent inflation data as welcome news, but not evidence that the job is done,” said Ryan Sweet, chief U.S. economist at Oxford Economics. “The Fed still has more work to do.”

At the same time, the rapid rise in Treasury yields in recent weeks has already tightened financial conditions substantially. Another massive rate hike could be unnecessary overkill.

According to Krishna Guha of Evercore ISI, Powell will likely underscore “that the data has been coming in stronger than expected, but there has also been a big move in yields, which has tightened financial conditions, so no urgency for a policy response in November.”

Markets are currently pricing in a 65% chance that rates remain on hold at next month’s policy meeting. But there is still roughly a one-in-three chance of another 0.75 percentage point hike.

All eyes will be parsing Powell’s speech for any clues or direct guidance on the Fed’s next steps. While he is expected to avoid concrete commitments, his language choices will be dissected for shifts in tone or any hints at changes in thinking around the policy trajectory.

Powell’s remarks will also be scrutinized for takeaways on how long the Fed may need to keep rates elevated before ultimately cutting. Luke Tilley of Wilmington Trust expects Powell “to keep talking about staying vigilant” and the need for rates to remain higher for longer to ensure inflation comes down sustainably.

With growing recession fears on Main Street and Wall Street, Powell faces a defining moment to communicate a clear roadmap of where monetary policy is headed, while retaining flexibility. Walking this tightrope will be critical to shoring up the Fed’s credibility and avoiding unnecessary market turmoil.

All eyes are on the Fed chair tomorrow as investors and economists eagerly await guidance from the man himself holding the levers over the world’s most influential interest rate.

The FOMC Minutes Show Officials Divided on Need for More Rate Hikes

The Federal Reserve released the full minutes from its pivotal September policy meeting on Wednesday, providing critical behind-the-scenes insight into how officials view the path ahead for monetary policy.

The minutes highlighted a growing divergence of opinions within the Fed over whether additional large interest rate hikes are advisable or if it’s time to ease off the brakes. This debate reflects the balancing act the central bank faces between taming still-high inflation and avoiding tipping the economy into recession.

No Agreement on Further Tightening

The September gathering concluded with the Fed voting to lift rates by 0.75 percentage point for the third straight meeting, taking the federal funds target range to 3-3.25%. This brought total rate increases to 300 basis points since March as the Fed plays catch up to curb demand and cool price pressures.

However, the minutes revealed central bankers were split regarding what comes next. They noted “many participants” judged another similar-sized hike would likely be appropriate at upcoming meetings. But “some participants” expressed reservations about further rate increases, instead preferring to monitor incoming data and exercise optionality.

Markets are currently pricing in an additional 75 basis point hike at the Fed’s December meeting, which would fulfill the desires of the hawkish camp. But nothing is guaranteed, with Fed Chair Jerome Powell emphasizing policy will be determined meeting-by-meeting based on the dataflow.

Concerns Over Slowing Growth, Jobs

According to the minutes, officials in favor of maintaining an aggressive policy stance cited inflation remaining well above the Fed’s 2% goal. The labor market also remains extremely tight, with 1.7 job openings for every unemployed person in August.

On the flip side, officials hesitant about more hikes mentioned that monetary policy already appears restrictive thanks to higher borrowing costs and diminished liquidity in markets. Some also voiced concerns over economic growth slowing more abruptly than anticipated along with rising joblessness.

The consumer price index rose 8.3% in August compared to a year ago, only slightly lower than July’s 40-year peak of 8.5%. However, the Fed pays close attention to the services and wage growth components which indicate whether inflation will be persistent.

Data Dependency is the Mantra

The minutes emphasized Fed officials have coalesced around being nimble and reacting to the data rather than sticking to a predefined rate hike plan. Members concurred they can “proceed carefully” and adjust policy moves depending on how inflation metrics evolve.

Markets and economists will closely monitor upcoming October and November inflation reports, including wage growth and inflation expectations, to determine if Fed policy is gaining traction. Moderating housing costs will be a key tell.

Officials also agreed rates should remain restrictive “for some time” until clear evidence emerges that inflation is on a sustainable path back to the 2% target. Markets are pricing in rate cuts in late 2023, but the Fed wants to avoid a premature policy reversal.

While Americans continue opening their wallets, officials observed many households now show signs of financial strain. Further Fed tightening could jeopardize growth and jobs, arguments made by dovish members.

All About Inflation

At the end of the day, the Fed’s policy decisions will come down to the inflation data. If price pressures continue slowly cooling, the case for further large hikes diminishes given the policy lags.

But if inflation remains sticky and elevated, particularly in the services sector or wage growth, hawks will maintain the pressure to keep raising rates aggressively. This uncertainty means volatility is likely in store for investors.

For now, the Fed is split between officials who want to maintain an aggressive tightening pace and those worried about going too far. With risks rising on both sides, Chairman Powell has his work cut out for him in charting the appropriate policy course.

Jobs Report Rockets Past Wall Street Estimates

The September jobs report revealed the U.S. economy added 336,000 jobs last month, nearly double expectations. The data highlights the resilience of the labor market even as the Federal Reserve aggressively raises interest rates to cool demand.

Economists surveyed by Bloomberg had forecast 170,000 job additions for September. The actual gain of 336,000 jobs suggests the labor market remains strong despite broader economic headwinds.

The unemployment rate held steady at 3.8%, unchanged from August and still near historic lows. This shows employers continue hiring even amid rising recession concerns.

Wage growth moderated but still increased 0.3% month-over-month and 5.0% year-over-year. Slowing wage gains may reflect reduced leverage for workers as economic uncertainty increases.

The report reinforces the tight labor market conditions the Fed has been hoping to loosen with its restrictive policy. Rate hikes aim to reduce open jobs and slow wage growth to contain inflationary pressures.

Yet jobs growth keeps exceeding forecasts, defying expectations of a downshift. The Fed wants to see clear cooling before it eases up on rate hikes. This report suggests its work is far from done.

The September strength was broad-based across industries. Leisure and hospitality added 96,000 jobs, largely from bars and restaurants staffing back up. Government employment rose 73,000 while healthcare added 41,000 jobs.

Source: U.S. Bureau of Labor Statistics via CNBC

Upward revisions to July and August payrolls also paint a robust picture. An additional 119,000 jobs were created in those months combined versus initial estimates.

Markets are now pricing in a reduced chance of another major Fed rate hike in November following the jobs data. However, resilient labor demand will keep pressure on the central bank to maintain its aggressive tightening campaign.

While the Fed has raised rates five times this year, the benchmark rate likely needs to go higher to materially impact hiring and wage trajectories. The latest jobs figures support this view.

Ongoing job market tightness suggests inflation could become entrenched at elevated levels without further policy action. Businesses continue competing for limited workers, fueling wage and price increases.

The strength also hints at economic momentum still left despite bearish recession calls. Job security remains solid for many Americans even as growth slows.

Of course, the labor market is not immune to broader strains. If consumer and business activity keep moderating, job cuts could still materialize faster than expected.

For now, the September report shows employers shaking off gloomier outlooks and still urgently working to add staff and retain workers. This resiliency poses a dilemma for the Fed as it charts the course of rate hikes ahead.

The unexpectedly strong September jobs data highlights the difficult balancing act the Fed faces curbing inflation without sparking undue economic damage. For policymakers, the report likely solidifies additional rate hikes are still needed for a soft landing.

Fed Keeping Rates Higher Despite Pausing Hikes For Now

The Federal Reserve left interest rates unchanged on Wednesday but projected keeping them at historically high levels into 2024 and 2025 to ensure inflation continues falling from four-decade highs.

The Fed held its benchmark rate steady in a target range of 5.25-5.5% following four straight 0.75 percentage point hikes earlier this year. But officials forecast rates potentially peaking around 5.6% by year-end before only gradually declining to 5.1% in 2024 and 4.6% in 2025.

This extended timeframe for higher rates contrasts with prior projections for more significant cuts starting next year. The outlook underscores the Fed’s intent to keep monetary policy restrictive until inflation shows clearer and more persistent signs of cooling toward its 2% target.

“We still have some ways to go,” said Fed Chair Jerome Powell in a press conference, explaining why rates must remain elevated amid still-uncertain inflation risks. He noted the Fed has hiked rates to restrictive levels more rapidly than any period in modern history.

The Fed tweaked its economic forecasts slightly higher but remains cautious on additional tightening until more data arrives. The latest projections foresee economic growth slowing to 1.5% next year with unemployment ticking up to 4.1%.

Core inflation, which excludes food and energy, is expected to fall from 4.9% currently to 2.6% by late 2023. But officials emphasized inflation remains “elevated” and “unacceptably high” despite moderating from 40-year highs earlier this year.

Consumer prices rose 8.3% in August on an annual basis, down from the 9.1% peak in June but well above the Fed’s 2% comfort zone. Further cooling is needed before the Fed can declare victory in its battle against inflation.

The central bank is proceeding carefully, pausing rate hikes to assess the cumulative impact of its rapid tightening this year while weighing risks. Additional increases are likely but the Fed emphasized future moves are data-dependent.

“In coming months policy will depend on the incoming data and evolving outlook for the economy,” Powell said. “At some point it will become appropriate to slow the pace of increases” as the Fed approaches peak rates.

For now, the Fed appears poised to hold rates around current levels absent a dramatic deterioration in inflation. Keeping rates higher for longer indicates the Fed’s determination to avoid loosening prematurely before prices are fully under control.

Powell has reiterated the Fed is willing to overtighten to avoid mistakes of the 1970s and see inflation fully tamed. Officials continue weighing risks between high inflation and slower economic growth.

“Restoring price stability while achieving a relatively modest increase in unemployment and a soft landing will be challenging,” Powell conceded. “No one knows whether this process will lead to a recession.”

Nonetheless, the Fed chief expressed optimism that a severe downturn can still be avoided amid resilient household and business spending. The labor market also remains strong with unemployment at 3.7%.

But the housing market continues to soften under the weight of higher rates, a key channel through which Fed tightening slows the economy. And risks remain tilted to the downside until inflation demonstrably falls closer to target.

For markets, clarity that rates will stay elevated through 2024 reduces uncertainty. Stocks bounced around after the Fed’s announcement as investors processed the guidance. The path forward depends on incoming data, but the Fed appears determined to keep rates higher for longer.