The Fed sees a narrow path for US soft landing
Friday 04 November 2022
November 2022 | 2 minute read
The Federal Open Market Committee (FOMC) met on 1 & 2 November and, as expected by market participants, decided to increase the Fed funds rate by 75 basis points to the range between 3.75-4.00%. The US central bank, showing its commitment to fight the persistently high inflation, has now hiked rates six times in total since March 2022, with four of them by 75bp.
The Fed statement was perceived as dovish by market participants, who initially reacted by buying equities and US Treasuries and selling US dollars, as they felt that a reduction of the size of the rate increases was on the horizon. Changes in the FOMC statement reinforced the rally, as they were interpreted as a sign of the ongoing debate within the committee on the topic of balancing a reduction of the size of future hikes and keeping the tightening on course.
On the contrary, Jerome Powell, the Chair of the US Federal Reserve (right), adopted a hawkish tone during the press conference, clarifying that there was no intention to alter the current monetary policy stance in the near future. Powell pointed out that incoming data on inflation and labour market since the last meeting suggest that the ultimate level of interest rates will be higher than expected, and reiterated the Fed’s commitment to reaching the long-term target of 2% inflation.
Additionally, Powell underlined that it would be premature to discuss a pause in the tightening cycle, hinting that the space for the soft landing has reduced, even if the Fed maintains its optimism. The remarks in the press conference contributed to reverse the course of the rally, as markets changed their course with US stock exchanges closing in negative territory.
Looking ahead, it appears that the Fed terminal rate, the level at which the US central bank is expected to stop hiking its rates, could be higher than expected. This perception has been reinforced by some of Powell’s comments, as he mentioned how “incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected”.
We expect that the Fed will stay in restrictive territory for a prolonged period, regardless of when it will reach the terminal rate. It appears that the Fed believes the risk of doing too little to tame inflation still outweighs the cost of doing too much, as it has the tools necessary to clean up a ”policy mistake”.
In this uncertain environment, it looks like that the path to a US soft landing has narrowed even more.
Source: Amundi Institute, 1-2 November FOMC meeting: debating a downshift, not a pivot, 3 November 2022
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Date of first use: 4 November 2022
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