
Going into the latest meeting there were two questions dominating investors minds. Firstly, will the Federal Reserve signal a November rate hike? Secondly, will the Federal Reserve signal a higher rate path for 2024 and beyond? Both of these questions were answered at the latest meeting. A November rate hike was projected in the latest dot plot. The 2024 medium top plot was raised to 5.1% from 4.6 to 5%. The 2025 dots were revised up to 3.9% from 3.375%. The longer-run outlook was increased to 2.9% from 2.5%, so the Fed was clearly communicating that it expects interest rates to be higher than it did in June’s meeting.
Why the hawkish tilt?
Powell said that it was stronger economic activity as the main reason for needing to do more on rates. This is reflected in the summary of economic projections where a change in real GDP has been increased to 2.1% up from 1% in June. The US economy is stronger than the Fed had expected, which means it can afford to do more on rates. This gave it the confidence to deal more aggressively with inflation.
But there is a high degree of uncertainty
Although Jerome Powell did not signal a peak in US rates, he did point out there was a high degree of uncertainty with these projections. He also stressed that the Fed would continue to make decisions on a meeting-by-meeting basis, and it would be proceeding carefully. This means the incoming data will be carefully scrutinised by the Federal Reserve. When asked about cutting interest rates, he said the time will come at some point, but he’s not saying when. So, the message is that uncertainty is a key point to note and this makes the incoming data very important.
Inflation readings moving in the right direction
Powell repeated that further rate hikes may be appropriate and the Fed will cut rates restrictive until the Fed is confident inflation is moving down to 2%. The latest inflation print shows inflation moving in the right direction and further falls in inflation will give the Fed confidence that rates are restrictive enough.
What to watch going forward
This means the incoming data continues to be very important for the Federal Reserve and there are two areas we now know to focus on. Firstly, if growth starts to show signs of slowing, the Fed has said that that is a key driver of higher rates, so slowing growth should mean slower rates. Secondly, inflation is important as the Fed seeks to bring it down to the 2% target. If we see inflation moving decisively lower we know that too will give the Fed confidence for a lower rate path. A lower rate path should weaken the dollar send yields lower and weaken the dollar yen.