The Fed Pivots Away from a Pivot

This week, the Federal Open Market Committee (FOMC) delivered another significant rate hike, lifting the Fed Funds Rate by 75 basis points to a range of 3.75%-4.00%. The move was well-signaled, and the meeting was closely watched for any signs that the Fed might soon pivot from this rapid pace of tightening.

Before the meeting, rumors spread that Fed governors were ready to slow down. The FOMC statement opened the door to that path with a new sentence: “In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”

In effect, the FOMC admitted this year’s substantial tightening has not yet shown results. Inflation remains high, and labor markets have scarcely cooled. By emphasizing cumulative tightening and lagged effects, the FOMC set the stage for a more patient posture, allowing themselves time to watch how markets work through tighter conditions.

But this was no dovish meeting. In his press conference, Fed Chair Jerome Powell repeated that it is “premature” to consider pausing hikes. Significantly, he also mentioned that interest rates may need to move higher than was expected as of the September meeting. This upset the relative certainty provided by the September dot plot, which showed consensus that rates would not exceed 5%. We have adjusted our expectations for the Fed upward on the basis of Powell’s remarks.

The Fed Chair also reiterated his view that the risk of too much tightening is less than the risk of doing too little. If the FOMC pushes rates too high, they can then loosen policy; if they move too slowly, they may find it difficult to halt the course of entrenched inflation. In sum, slower tightening is still tightening, and this hiking cycle is not complete.