At their latest meeting, Federal Reserve officials showed little enthusiasm for lowering interest rates in the near future, as inflation remains above their target. The minutes of the October 31st to November 1st meeting highlighted the apprehension that inflation could be highly resistant or increase, and that additional measures could be necessary. The summary underscored the importance of keeping policy so tight as to return inflation to the central bank's 2% objective over time. However, the minutes also noted that caution should be taken when making decisions, evidenced by the predominance of sentiment on Wall Street that the Fed is no longer considering any hikes. Futures trading is even signaling the possibility of four 0.25% cuts by the end of 2024.
At the November 1 meeting, the minutes did not mention members considering any potential rate reductions. This was echoed in Jerome Powell's press conference following the meeting, "The Committee is not thinking about rate cuts right now at all." The fed's benchmark funds rate, standing at 5.25%-5.5%, is the highest it has been in 22 years. During the meeting, rising Treasury yields were a major discussion point and, interestingly, the same day, the Treasury Department issued a statement that their borrowing needs over the coming months were less than what the markets had predicted.
The meeting saw yields go down off 16-year highs as markets began to feel the weight of the government's heavy borrowing, as well as to consider what the Fed might mean for rates. It was concluded that the growth in yields had been caused by "term premiums" - the extra yield expected from holding longer-term securities. This increase was linked to the larger supply of funds required to finance the government's immense deficit. Other aspects examined included the Fed's approach to monetary policy, and opinions on inflation and growth. The minutes noted that, however, it was important to stay alert to how market developments evolve, given their potential effect on the course of monetary policy. At the same time, the risk to the economy is weighted to the downside, while the risk to inflation is on the upside. According to the Fed's minutes, the current restrictive policy is contributing to slowing economic activity and inflation. FOMC members have different perspectives on the effectiveness of the Fed's 11 rate hikes totalling 5.25%, with some believing further hikes may be desirable while others think the Fed should remain as-is. Evidently, the economic data is split, but broadly favourable for inflation. Core Personal Consumption Expenditures price index marked 3.7% in September, having improved by one full percentage point since May, but is still higher than the Fed's target. The tight labour market and strengthening wage growth could complicate the Fed's mission to get inflation down. With nonfarm payrolls slowing down to 150,000 in October, the unemployment rate is also increasing, at 3.9%. The Atlanta Fed's GDPNow tracker suggests a growth rate of 2% for the last quarter of 2023.
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