The Possibility of Further Interest Rate Hikes: An Analysis


Federal Reserve Chairman Jerome Powell made an important statement on Wednesday, leaving room for the possibility of interest rate hikes by the central bank. However, there is an increasing likelihood that a pause in rate hikes will take place in December and beyond.

During the two-day November meeting, it was widely anticipated that the central bank would maintain steady interest rates. Therefore, all eyes were on Powell during his subsequent press conference to provide any insights that would challenge the prevailing belief that the Fed is finished raising interest rates, despite signs of elevated inflation, a tight labor market, and a strong economy.

Unfortunately, Powell did not offer any such remarks. In the past, he had emphasized that the risks of doing too little were greater than the risks of doing too much. However, he now states that these risks are “getting more balanced.” Moreover, he acknowledged positive developments in both inflation and wage growth. While emphasizing that rates are currently “clearly restrictive,” Powell also acknowledged that the focus is now on gaining confidence that policy is tight enough, suggesting that it may already be so.

Crucially, Powell downplayed the importance of the Fed’s quarterly projections known as the “dot plot,” which outline the expected federal-funds rate. As of September, this plot indicated one more quarter-point rate hike for this year. Powell expressed skepticism about its efficacy over the three-month period between two meetings, highlighting that these projections are not binding promises or future plans.

Considering all these factors, it is clear that Powell has raised the bar for any future interest rate increases. Central bank officials will now require stronger evidence before they consider elevating interest rates from their current range of 5.25% to 5.5%. Given the rise in bond yields, tightening financial conditions, and cooling inflation, it is highly likely that this new threshold for rate hikes might never be met.

The Federal Reserve’s Stance: A Steady Hold or Further Tightening?

Investors are signaling their agreement with the Federal Reserve’s (Fed) recent press conference. According to the CME FedWatch tool, there has been a significant shift in sentiment, with an 82% chance priced in that the central bank will hold rates steady in December. This is an increase from the 70% chance just the day before.

The market interpretation seems to be that the Fed is now in a “hold” mode, leaning towards tightening policy rather than simply being on pause. Wells Fargo’s chief economist, Jay Bryson, supports this view, noting that the Fed’s bias still favors further tightening. He emphasized that rate cuts are not currently under consideration.

Federal Reserve Chair Jerome Powell, while careful not to rule out the possibility of another rate hike entirely, made it clear that the central bank wants to maintain flexibility. Powell checked all the necessary boxes to preserve various policy options moving forward. He emphasized that the committee’s inclination is towards further tightening.

Despite this hawkish tone, Powell did not sound particularly eager to hike rates again. Steve Englander from Standard Chartered Bank highlighted that Powell made it clear that a rate cut is far from being considered.

It is worth noting that circumstances could arise that would warrant another rate hike. The recent rise in bond yields has made financial conditions more restrictive, but Powell emphasized that it is uncertain whether these conditions will persist. If there is a reversal, it could necessitate further policy tightening.

Powell also acknowledged that inflation may start to tick upward by the end of the year as progress towards the 2% target rate occurs intermittently. Additionally, the strength of the labor market could push wages up, stimulating further spending and potentially leading to another quarter of growth above potential.

Powell stressed that each meeting will be evaluated independently and that no firm commitments have been made beyond December. However, given the current data trends, a rate hike seems unlikely.

As we approach the next meeting, the stage seems to be set for a steady hold, with the possibility of future tightening still on the table.

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