U.S. Fed pauses interest rate hike for the second time in a row - Tata Mutual Fund
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Event
• The Fed in its 31 Oct/01 Nov 2023 Federal Open Market Committee (FOMC) meeting, unanimously agreed to keep the target range of its Fed Funds Target Rate (FFTR) unchanged at 5.25%-5.50%.
• This was the second consecutive pause and the third in the Fed’s current rate hike cycle after having raised rates for ten meetings in a row before taking a first pause in Jun followed by another 25-bps hike in Jul.
• The Fed reiterated that it would continue to reduce its balance sheet, thus far the Fed’s holdings of securities has been reduced by more than USD1 trillion from the peak back in Apr22.
• Chair Powell indicated that the Fed did not discuss rate cuts. At this point, the Fed is still focused on containing inflation which remained above the Fed’s price stability target. But they have now included financial stability condition also, which was not present in the previous FOMC statement.
Growth
• The latest meeting does not come with revised projection to reflect the FOMC members updated economic projection.
• The FOMC described the recent performance of the US economy as stronger than expected.
• Given the continued resilience in the US economy, the US economy grew strongly at annualized +4.9%QoQ in 3QCY23 (2QCY23: +2.1%QoQ) mainly due to the pick-up and robust growth in in consumer spending (3QCY23: +4.0%QoQ; 2QCY23: +0.8%QoQ).
Interest rate outlook
• The monetary policy is now in the restrictive territory, putting downward pressure on economic activity, hiring, and inflation.
• Although inflation moved down from its peak, its still above the 2% target.
• Fed will proceed “carefully” in the upcoming meeting as they assess the incoming data and the evolving outlook and risks.
• Although the FFR target is unchanged, the reduction in the Fed’s holding of securities will continue to contribute to the quantitative tightening, in addition to the increase in the US treasury yields, indicative of tighter financial conditions.
• The Federal Reserve highlighted its commitment to take the necessary actions to ensure price stability. This suggests the possibility of another policy rate hike remains an option.
• The Fed also highlighted that the impact of the recent conflict in Middle east on the economy is still unclear. Like the war in Ukraine, it could affect commodity prices and supplies.
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