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MarketScape · 09.21.23

Proceeding Carefully - The Fed's New Mantra

The Fed announced a policy pause with an emphasis of “proceeding carefully” in tackling inflation and adjusting future interest rates. Head of Global Macro for Global Fixed Income Antulio Bomfim, Ph.D., examines what it means for investors.
Markets & Economy
Central Banks
Monetary Policy
Head of Global Macro, Global Fixed Income
Key Points
What this is
We analyze the Federal Reserve's decision to maintain its policy rate and comments after the decision.
Why it matters
The key question for the Fed is whether the current rate is sufficiently restrictive to dampen inflation.
Where it's going
All eyes are on economic data related to the labor market and economic activity for signs of what the Fed may do next.

The policy statement released by the Federal Open Market Committee on Wednesday was largely as anticipated: They announced a pause. The main news came from the Committee’s revised “,” and the Q&A portion of the Chair’s press conference.  The economic projections and the Chair’s comments reiterated the Committee’s determination in its fight against inflation, apparently more so than what was priced in the market.  Let’s take a closer look.


“Proceeding Carefully” — Pausing Does Not Mean Ending


Chair Powell broadly characterized the pause in the Committee’s tightening campaign as part of the process of “proceeding carefully in determining the extent of additional policy firming that may be appropriate.” By our count, he used the “proceeding carefully” expression — or something very close to it — 10 times!


He cautioned against interpreting this week’s pause as a signal that the Committee thinks it is done raising rates.  He suggested that a key question now is determining which level of the federal funds rate is “sufficiently restrictive” and how long it should stay at that level.  Looking at the current data, which included — as the Chair noted — three months of “good inflation readings,” nearly two-thirds of the policymakers still think they are not quite yet “sufficiently restrictive,” seeing one more rate hike as appropriate this year. 


“Proceeding Carefully” Apparently Cuts Both Ways


Perhaps the most telling aspect of the monetary policy news was an upward revision in policymakers’ views on the appropriate level of the federal funds rate in coming years — part of the so-called “dot plot.” The median view now sees the equivalent of only two 25-basis-point cuts as appropriate for next year, compared to four 25-basis-point cuts in the previous projection.  We took the anticipated slower pace of cuts next year as an indication that the Chair’s “proceeding carefully” mantra cuts both ways — that is, it applies to further hikes as well as cuts! 


Key Data to Watch


Chair Powell reiterated that the Committee is “prepared to raise rates further if appropriate,” and that they “intend to hold policy at a restrictive level” until they are “confident that inflation is moving down sustainably toward” 2 percent.  So — not surprisingly — all eyes remain on the incoming data on inflation.  But the  plot also highlight the importance of the surprisingly strong data on the labor market and economic activity, which can have the potential to be inflationary.  As the Chair noted when commenting on the higher dots, “stronger economic activity means we have to do more with rates.”

Main Point

All Eyes on Incoming Data

Fed Chair Jerome Powell reiterated that the Federal Open Market Committee is “prepared to raise rates further if appropriate,” and that they “intend to hold policy at a restrictive level” until they are “confident that inflation is moving down sustainably toward” its target of 2%. So all eyes remain on the incoming data on inflation.


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Antulio N. Bomfin

Head of Global Macro – Global Fixed Income

Antulio Bomfim, head of global macro for the global fixed income team, oversees interest rate strategy, systematic volatility, liquidity and monitoring of systemic risk globally. He is also responsible for the firm’s global liquidity management business.

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