Investors hopes of a clear Fed ‘pivot’ face a stern test Wednesday as Chairman Powell prepares yet another jumbo rate hike amid stubborn inflation pressures and a tight jobs market.
Investors looking for a clear signal that the Federal Reserve plans to slow, or perhaps even pause, its relentless rate hike path are likely to be disappointed when Chairman Jerome Powell lays out his inflation-fighting tactics later today in Washington.
Markets are in near unanimity the Powell and his colleagues will deliver another 75 basis point rate hike today in Washington, the fourth in succession, but are largely split as to how the Fed will move when it meets again in December, thanks in part to both suggestions of slowing inflation pressures and dovish signals from central banks — which are still hiking rates — in major economies around the world.
Last week’s reporting from the Wall Street Journal, as well, raised the issue of a Fed moving too quickly for the underly economy to bear added to expectations of a potential policy ‘pivot’, as did comments from San Francisco Fed President Mary Daly, who told a conference in Monterey, California that “we have to make sure we are doing everything in our power not to overtighten, and we can’t pull up too fast, and say we are done.”
The CME Group’s FedWatch tool, a real-time indicator for the direction of Fed Fund futures, suggests a 50.3% chance of a smaller 50 basis point hike in December, with bets on either a hold or a 25 basis point hike in February totaling 76.4%.
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However, while the Fed’s preferred measure of inflation, the core PCE price index, eased modestly last month, but is still running at a 4.9% annual clip.
Headline inflation is within touching distance of the fastest pace in four decades, personal incomes are also moving higher, and the September JOLTS report suggest some 10.7 million positions remained unfilled, a precursor to faster wage growth over the final months of the year as holiday hiring intensifies.
“Evidence of fading (inflation) pressure in the pipeline is abundant, but it is yet to hit the numbers which the Fed Chair has said clearly on multiple occasions matter most, namely, the actual core inflation data,” said Ian Shepherdson of Pantheon Macroeconomics. “The most he can give doves is a clear statement that the Fed will pivot as soon as the data move, but we doubt that will be enough to prevent disappointment among some investors.”
Powell may instead indicate a desire to slow the pace of rate hikes, in nod to recent dovish signals from the Bank of Canada, the Reserve Bank of Australia and last week’s European Central Bank meeting, while adding conditions linked to data dependency, effectively delaying any true pivot signal until the October inflation figures are released on November 10.
“With inflation failing to behave as the Fed would like, the central bank is going to be reluctant to slow the pace of hikes until there is evidence that price pressures are moderating,” said ING’s chief international economist James Knightley. “As such we have to keep the option open for a 75 basis point hike in December, even if the Fed language is a little softer.”
Benchmark 10-year Treasury note yields are edging higher, at 4.046%, ahead of the Fed rate decision at 2:00 pm Eastern time, with 2-year notes rising to 4.521%.
