This week, the FOMC meeting once again paused interest rate hikes, and on the same day, the Treasury Department announced a reduction in its Q4 bond issuance estimate. Has the Federal Reserve concluded its cycle of interest rate hikes? Has the impact of bond yields on the stock market come to an end? This article will delve deep into these questions, as well as explore the market opportunities and challenges.
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1. FOMC holds fire in November as financial tightening risks mount
In November, the FOMC once again decided to keep interest rates unchanged, with the statement adding a new focus on financial tightening risks. All members of the FOMC agreed to maintain interest rates in the range of 5.25% to 5.50%, the statement was nearly identical to the one from September, with only minor updates regarding the stronger than expected economic growth in Q3. However, the statement did mention the uncertainty surrounding the impact of financial tightening risks on the economy, with a reaffirmation of the commitment to assess further information and its implications for monetary policy, which was not included in the September meeting. Here is a summary:
Economic and Inflation Outlook: healthy GDP growth overshadowed by rising financial risks
In terms of the economy, the statement acknowledged the incredibly strong pace of domestic GDP growth in Q3, as well as a robust labor market. In the section discussing bank crises and credit tightening uncertainty, the statement added fresh concerns about financial tightening risks ahead, given the significant rise in long-term yields in recent weeks. The committee will closely monitor these developments while maintaining a high level of vigilance regarding inflation risks.
Forward Guidance: emphasis on remaining ‘data dependent’
In its forward guidance, following the removal of the phrase "expecting some additional tightening to achieve a sufficiently restrictive stance of monetary policy" back in May, the June meeting added the statement that the pause in rate hikes is primarily to allow committee members to assess more information and its impact on monetary policy. This statement pressed on at the November meeting.
Monetary Policy Tools: balance sheet reduction ongoing; strong commitment to tamp down inflation
All FOMC members voted to maintain interest rates within the 5.25% to 5.50% range and the committee will continue to reduce its holdings of U.S. Treasury securities, agency debt, and MBS, as outlined in last year's May statement. As expected, the committee remains committed to bringing inflation back to the 2% target.
2. Powell's post-conference Q&A:
View on rising long-term yields: a welcomed development
Q: To what extent has the recent increase in long-term bond yields influenced the Fed's actions at this meeting?
