The Federal Reserve appears virtually certain to keep rates on hold at their November 1 interest rate announcement. That’s according to recent statements from Fed policymakers and the expectations of fixed income markets. However, the more interesting question is what the Fed signals about the prospect of another possible interest rate increase in the next few months and the potential path for rate cuts in 2024.
Rates Likely On Hold
The Fed is likely plans to hold rates at their current 5.25% to 5.5% range at its November 1 decision for a few reasons. The first is that the 10-year U.S. Treasury Bond yield has risen sharply over recent weeks. At the Fed’s last meeting the yield stood at 4.5% and it’s now closer to 4.9%. That’s a big jump in a closely watched fixed income benchmark and the Fed argues that that increase in longer term rates has done a lot of work in tightening monetary policy. In fact, Fed officials have described this move in rates as broadly equivalent to another interest rate hike.
Furthermore, economic data has been fairly encouraging. Core inflation has continued to cool, which is the primary metric, for now. In addition, the job market though continuing to run relatively hot, has shown a little more balance between supply and demand with wage growth slowing.
The main concern for the Fed is that the economy is performing well, and though that’s not a bad thing, this trend may create additional inflationary pressure. For example, 4.9% growth for Q3 2023 may be taken as a sign that the economy is running a little too hot when the Fed is hoping to bring inflation down further. The Fed has stated that if the economy doesn’t show further signs for easing back from current levels of strong growth, then incremental interest rate hikes may be needed.
What To Watch For From The Fed
Assuming the Fed leaves interest rates unchanged, the first thing to look for will be if it is a consensus decision from policymakers. If some officials voted for an interest rate increase, that may make another interest rate hike over the coming months more likely. That said, in recent years, Chair Powell has been able to build consensus across policymakers. Achieving consensus may be harder now that the Fed is fine-tuning policy.
The second thing to look for will be how Powell discusses any future interest rate increase at the press conference. In recent weeks, the Fed’s base case appears to have shifted to holding rates at current levels, with higher rates being more of a contingency. Previously, it was the reverse, a rate increase was the more likely outcome. It will be interesting to see how Powell talks about those various scenarios.
Lastly, it will be worth noting the extent to which Powell is entertains questions on interest rate cuts. Up until now the message from the Fed was that rates would remain at elevated levels for some time, likely until the second half of 2024. It will be notable if Powell is starting to discuss in a little more detail when and under what criteria rates might fall. However, for now, Fed messaging has focused on maintaining restrictive policy for some time.
The November Fed meeting may be less significant for markets with interest rates almost certain to be held at current levels. However, clues on the chances of another interest rate hike and the trajectory for rates later in 2024 will be closely monitored.