Transitioning Carefully
The Fed’s latest policy statement seems to suggest they are carefully transitioning from the question of when to stop raising rates to when to start cutting them, with an eye on inflation and growth.
- Markets & Economy
- Liquidity
- Central Banks
- Monetary Policy
Key Points
What it is
We examine the Federal Reserve’s December statement, and their comments afterward, about keeping the target range for the federal funds rate unchanged.
Why it matters
The Fed’s main message seems to be they are carefully transitioning from the question of when to stop raising rates to when to start cutting them.
Where it's going
We think the Fed will proceed more carefully in this transition than the market currently anticipates, keeping an eye on inflation and growth.
As widely anticipated, the Federal Open Market Committee kept its target range for the unchanged this week. The main news came during Chair Powell’s press conference and, to a lesser extent, from the policy statement, and the Committee’s revised interest rate projections (the “dot plot”). The Committee’s main message seems to be that they are carefully transitioning from the question of when to stop raising rates to one of when to start cutting them. We think the Committee will proceed more carefully in this transition than the market currently anticipates. Let’s take a closer look.
On the surface, the December policy statement was almost unchanged from November, if not for the addition of one particular word. In the November statement, the Committee was assessing the “extent of additional policy firming that may be appropriate.” The December statement now refers to “the extent of any additional policy firming that may be appropriate.” The Chair clarified that the addition of “ANY” acknowledged that the Committee now believes it is “likely at or near the peak rate for this cycle.” This is stronger language than Powell’s November message, which stated that the Committee was “not confident yet” that its policy stance was “sufficiently restrictive.”
Powell characterized the Committee as having faced three main questions since the beginning of the current rate cycle. The first was about how fast to raise rates. And the answer was to move quickly at the start. The second question was about how high to raise rates. He suggested that this question remains live, but mostly only to the extent that the Committee doesn’t want to take the possibility of another hike off the table. And then there is the third question, which is about when to . He noted this question is now “beginning to come into view.”
The market seems to have taken “beginning to come into view”— together with an increase in the median anticipated number of cuts in 2024 (from 2 in the September dot plot to 3 now) — as an indication that rate cuts as early as this March are highly likely. We see it differently. We believe that before it starts cutting rates, the Committee will want to be confident that inflation is coming down sustainably to 2 percent. But for that to happen, Powell suggested that they “need to see more progress” on the inflation front. He also noted that, if above-trend GDP growth persists, “that could mean we need to keep rates higher for longer” or even “hike again.” So, inflation and growth indicators remain the key data to watch!
The federal funds rate is the interest rate at which banks trade federal reserve funds with each other overnight. The Federal Open Market Committee of the Federal Reserve meets regularly to set a target federal funds rate to influence interest rates broadly and economic growth.
Main Point
Keeping an Eye on the Data
Fed Chair Jerome Powell suggested that they “need to see more progress” on the inflation front. He also noted that, if above-trend GDP growth persists, “that could mean we need to keep rates higher for longer” or even “hike again.” So, inflation and growth indicators remain the key data to watch.
MarketScape
Antulio N. Bomfim
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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