Name: The Fed’s Next Interest Rate Move: Explaining the Latest FOMC Meeting
Uploaded: 2023-11-01T20:50:00Z
Duration: 16 min 45 s
Description: Will the strong U.S. economic data we’ve seen push the Fed to change policy this year? What comes next depends on how the Fed will interpret the data. WSJ’s Dion Rabouin will explain what we’ve learned from the November FOMC meeting. Photo: Sarah Silbiger/Bloomberg News

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Will the strong U.S. economic data we’ve seen push the Fed to change policy this year? What comes next depends on how the Fed will interpret the data. WSJ’s Dion Rabouin will explain what we’ve learned from the November FOMC meeting. Photo: Sarah Silbiger/Bloomberg News

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The Fed’s Next Interest Rate Move: Explaining the Latest FOMC Meeting

Hey, everybody, thank you so much for being with us. Welcome, welcome, welcome into "Market Takes." We got a little bit of a different setup right now and we are coming to you a little bit late. Had some trouble with the old laptop here, but we're back up and running. Appreciate you sticking with us and joining us here on "Market Takes." I'm Dion Rabouin, Reporter at The Wall Street Journal, and today we are digging into the Fed's, the latest FOMC Meeting, the statement and the press conference by Fed Chair Jerome Powell. This moved markets in a big way today. We're gonna talk about what happened and why it happened because if you're looking at the markets, you're seeing a lot of those red: bond yields going down, stock prices going way, way up. We are gonna break it all down right here on "Market Takes." We are, of course, gonna talk about what the Fed decision was, dive into the statement and Fed Chair Powell's remarks at the press conference. We're gonna talk about how this decision affects the outlook for December and for 2024, and of course get into how markets reacted, talk about the big picture takeaways from today's report, and of course we are gonna talk about what comes next because we are always looking forward here on "Market Takes," even though it is usually with regard to backward looking data. The Fed statement just happening, Fed press conference just ending about half an hour ago or so. So we know that the Fed decided to keep rates unchanged at its Meeting as expected. Let's throw a chart up here on your screen so you can see just what we're talking about in terms of where rates are. So the Fed had raised rates to 5.2, five to 5.5%. Here's why I wanted to throw this chart up here on your screen, so you could get an idea of where we are historically speaking. The last time rates were as high as they were was back in 2001. And if you see up there on your screen, rates didn't really stay at that rate for very long. You saw 2001 rates were on their way down because we had entered that recession. Then, you see rates kind of start to pick back up around 2004, 2005, staying at that level a little bit above 5% just below where we are now, and then coming down again when we got that 2008 recession. So what the Fed is talking about when we talk about lower, or we talk about, excuse me, higher for longer, we're talking about that rate where we are right now, getting that line going across horizontally like we saw from 2005 to about 2007, 2008 there in doing something similar to that, keeping rates higher for longer than expected. A lot of folks were expecting it would be something similar to what we saw in 2018-'19 where we got rates up to 2%, 2 1.2%, and then they came right back down very quickly, and then we got that COVID recession, they went right back to zero. So also want to talk about this chart because take a look at where interest rates are from about 2016, '17, '18. They're going up there around zero to 1%, but still not above 2% much lower than where we are. I'm gonna talk about that in just a minute. So just keep in mind where rates were 2016, 2017, 2018, and this chart's just illustrating the way that rates have gone up significantly and what rates are going to be, how high they will be historically speaking if we do have higher for longer. Even if Fed doesn't raise rates more, we are still going to see a situation where rates are much higher than they have been historically and they stay at that level for some time. That would be really unusual for the period of history that we are in. So, wanted to just talk through that. Let's talk really quickly about the changes to the statement, because I think that was where we got a lot of the move from the market was not so much in what Fed Chair Powell did in his press conference, though I think he did hammer that message home, but what happened in the statement. Coming in to the Meeting today, there were no expectations for the Fed to raise rates. In November, that really wasn't what was in question. What was in question was: What's the Fed gonna do next? What happens in December? What happens in 2024? And we got some clues about maybe the Fed's bias or at least the market's expectation for the Fed's bias from what we heard today. So really quickly, the changes to the statement, pretty minimal but important. Largely the statement was the same. They said economic activity had expanded at a, quote, strong pace in the third quarter instead of just a solid pace overall, as they had said in the previous statement. Said job gains have moderated since earlier in the year rather than have slowed in recent months. That was the previous language. But the big change, the one that really I think caught the market. I don't know if you wanna say off guard, but really caught the market's attention was the statement to what they said about tighter credit conditions. Now, in September, the statement said, quote, "Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation." Today, that sentence was changed to read, "Tighter financial and credit conditions." Now, why does that matter that we're saying tighter financial conditions instead of just tighter credit conditions? It's tighter financial conditions, tighter credit conditions, both. When you add in that financial conditions piece, that's really interesting because by the Fed's own metric, by the Fed's own index, the Chicago Fed has put out this Financial Conditions Index, it just debuted pretty recently and have taken the data all the way back to the 1970s, 1980s. You can look this up, if you want, on your own time. They actually go back to all the way to 1971. So if you just look up Chicago Fed National Financial Conditions Index, you can find that index and look at it for yourself. But according to that metric, financial conditions are actually loose. Financial conditions are particularly loose right now when compared to history. So when you've got, like I said, the Fed funds rate up there, the highest it's been in 21 years, the Fed is saying, "Well, bond yields are rising. We're seeing stock price fall." We're seeing financial conditions tighten so much that they're putting it in the statement. But then you look at the Fed's metric for financial conditions and it's saying, "Nope, financial condition's not that tight." In fact, according to the Fed's metric, financial conditions are actually looser than they were a year ago. Financial conditions are significantly looser. There's a Goldman Sachs metric, which was put together by former Fed Governor Bill Dudley, along with one of their economists, the Chief Economist at Goldman Sachs, Jan Hatzius. That also is showing that financial conditions are looser. Looser than they were a year ago. Not only that, financial conditions are less tight than they were in the winter of 2016 and the winter of 2018 or about as tight, they're around that same level. So remember I showed you that chart of the Fed funds rate. That showed that rates were only about 1% in the winter of 2016, a little more than that, a little below that in 2016. In the winter of 2018, we're between one and 2%. Well, now, the Fed funds rate is up at 5%, above 5%, almost at 5 1/2%. And we're seeing financial conditions just as tight. Well, what that means is financial conditions are not that tight, but the Fed is saying they are, which gives investors and traders the sense that, "Okay, well if the Fed's pointing out financial conditions are tight and they're not even that tight, maybe their bias is to holding rates where they are. Maybe their bias is not to raise rates again." And that's very different than what we had seen earlier in the year. Earlier this-year and really going back to last year, the Fed's bias was to raise rates, tighten the economy, raise rates, and get things to cool down the economy. Now the Fed is saying, "Financial conditions have tightened," and they pointed out they were on a month-long tour. San Francisco Fed President Mary Daly even told me personally, she said, "The financial markets are doing some of our work for us." But markets know, they look at these financial conditions, they say, "Well, wait, no, these conditions aren't that tight. In fact, it's only around as tight as it was in 2016 and 2018 when rates were very low." So the market seems to be thinking that the Fed's bias is now not to raise rates, and I think that's why you're getting the big market reaction that you're seeing not only in the Fed fund's futures market where you did see a significant reaction. Expectations for the December Meeting for no hike at the December Meeting have now risen to 80%. They were as high as 85% during the press conference for Fed Chair Powell. Just a couple days, just yesterday, in fact, that rate was at 68%. About a week ago or a month ago, that was at 65%. So the market now saying, "A rate hike in December is effectively priced out because of what we heard and saw from the Federal Reserve today." I've been talking a lot about the market. Let me throw the market up here on your screen so you can see exactly what I'm talking about. So check it out here on your screen. What you're seeing right now, across markets, you are seeing stock prices really moving higher in a meaningful way. You've got the NASDAQ about 1.6%, and you see that liftoff point, it comes right about here, right around a little after 2:00 as the Chairman gets into his press conference, and really starts to kind of double down on, "Well, we're not sure what we're gonna do. Our bias isn't towards raising rates. We haven't made any decisions." Well, that's where the market really starts to take off. You're seeing a similar kind of function, a similar kind of reaction in the bond market. Look at the 10-year yield right there. Now, what we had seen is earlier in the day, yields had started to come down, but then they started to pick up a little bit and then that press conference happens, and boom, you just get this move lower on the 10-year, also the two-year, which is much more correlated to Fed policy. What expectations are for what the Fed's gonna do next. Look at this right around here, 2:00, you see it happening again, boom, just yields dropping in a significant way. The two-year yield is now below 5%. It hasn't been below 5%, it hasn't held below 5% for quite some time. You're seeing the two-year yield down about 14 basis points, the three-year down about 14 basis points, the 10-year down about 17 basis points. That is a big move. Usually, you see that kind of move happen over a month or so, at least over a week. This isn't today. This is a meaningful reaction to what the Fed said today. Also big currency move right here. You're seeing the euro rise higher, really picking up. It had been down significantly today versus the dollar, and now it's about to turn positive for the day. You're seeing the WSJ Dollar Index right here turned meaningfully lower. Basically, all those things telling you expectations for the Fed to raise rates again this-year have been kind of thrown out the window. Expectations for that much higher monetary policy for longer, expectations for higher rates on things like home mortgages, auto loans, all that, that's been priced out by the market, and you could see these numbers continue to move down if the market has conviction. One other thing I wanna point to you when we're talking about the market, crude oil, this had been a big increase. We're hovering right around that $80 a barrel range when we're looking at WTI crude oil. And that's big because again, that puts pressure on inflation that moves oil prices higher, moves those gasoline prices higher, fuel oil, all those things. And we have seen that move start to come down. Maybe not necessarily correlated with the Fed and what happened there, but definitely moving with the dollar. So you're seeing oil prices move down now And again, what we're seeing in the markets, really just illustrating the big picture theme right now of a reaction to what we heard from the Fed and from the Chairman. So what did we learn from the Fed Chair's press conference? The market takeaway is that Fed Chair Powell may be laying the groundwork for no hike. They've said, "We're data-dependent, data-dependent, data-dependent. During his press conference, Chair Powell didn't really stress data dependence so much. He's stressed, "Well, we're not sure what we're gonna do. Well, we don't really have a bias. We're not looking to raise rates soon. We're not looking to cut rates certainly, but we're not sure." He didn't say, "Data-dependent, data-dependent, data-dependent," the way that he has. And what that combined with this tighter financial conditions thing in their statement suggested to the market is the Fed doesn't want to raise rates. It was a surprisingly dovish press conference from the Fed Chairman. And what I mean by that is I think folks had really expected him to come out and hammer and pound the table and say, "We're thinking about raising rates, we just might do it. We could do it. Don't sleep. Don't get complacent thinking we're not gonna raise rates. We'll do it." And he didn't do that. And I think that, again, when he didn't do that, when he didn't talk up a possible rate hike for this month, I think the market projected, "Okay, there's not gonna be a rate hike next month." When Fed Chair Powell didn't talk about a rate hike for next month, market concluded there's not gonna be one. 2024, they probably start cutting, and you're seeing that in the Fed fund's futures market as well. Market pricing out more rate cuts for the end of the year than it had been earlier in the day. So I think that the biggest surprise today really has been this market reaction. Fed Chair Powell not coming out and saying, "We aren't raising rates," but the Chairman not saying that we are not saying our bias is to get rates higher, saying that we think conditions are tight enough, even when we see, when you look at the Fed's own metric, that market financial conditions are not that tight. I think the market got the sense that, "Okay, Fed doesn't wanna raise rates anymore," and that's why we're seeing the reaction that we saw. So what does that tell us for the outlook for the rest of the year, right? This decision sets the Fed up to hold rates in December. They will still get another Jobs Report. So we get the Jobs Report that's coming out next week or actually on Friday of this week, and then they'll get the December Jobs Report out December 8th before their Meeting the following week. So they'll get two more Jobs Reports, two more CPI Reports, and so they'll get to see what's going on with inflation. PPI Reports, which shows what businesses are paying, how business prices are moving, because those have been rising higher. They'll also get a PCE Report, some more data on Employment Cost Index. So the market's saying, "Regardless of what comes of that, we think there's gonna be no hike in December," and that's why you're seeing bond yields move lower, that's why you're seeing Fed funds futures prices move forward. So in terms of 2024, the expectation is... And starts to become for cuts, rather than for rate hikes. Rather than for raising rates more, the market may start to look for signs of: When's the Fed gonna cut rates? When's the Fed gonna start to lower rates? Because they think that maybe what they've done in inflation is enough. Really interesting question that Fed Chair Powell got asked during the press conference was: How do you feel about rate settling or inflation? How do you feel about inflation settling in at 3%? He didn't pound the table and say, "Absolutely not, we want 2% and we'll settle for nothing less." That's what he's been saying coming into this. Well, he said, "Well, we'd like to see them keep moving lower. We wanna see our 2% target. That's still our target, but we wanna see that." But he didn't pound the table. Let's put up really quickly here on your screens the dot plot so I can tell you what I'm talking about or show you what I'm talking about. This was what the Fed showed us in September. They said in 2023, when this came out in September, that by the end of the year, 12 voters on the committee expected that rates would have to go up at least one more time by the end of the year. And then by the end of 2024, the following year, most folks predicted that rates would either be where they were or lower. And you see that coming down and actually those rates are higher than they had been for a while. So this is what moved rates up. After that September Meeting, you saw bond yields really rise higher, and that was where you got that huge momentum in bond yields pushing up higher was from this right here, from the expectations from folks on the Fed that rates would have to be higher and they would be higher for longer. If you look at that longer run with rates down there, about two, 2 1/2%, they didn't get there really until 2026. So that suggests the Fed's gonna raise rates and keep them high. Well, now, what they've said is, "Maybe we don't have to raise rates as much." And so those 12 people who had said, "We think we need to raise rates one more time in 2023." It looks like they're gonna be wrong. Or at least that they don't have the crystal ball the same way the seven people who said rates will be the same as they were at the end of the year as where they are now did. So this chart, again, just illustrating what the Fed was projecting in September, and this Meeting really kind of goes against that, goes against that expectation, that bias to raise rates again one more time this year I think a lot of folks in the market had. Big picture takeaways. From what we know about 2023 from this Meeting is really just that there are unlikely to be another case. There are unlikely to be another rate hike. The Fed is gonna have a lot of work to do if it wants to talk markets into a rate hike. Next month, they're gonna have to say a lot, they're gonna have to do a lot. And the market knows they don't really want to do that. They don't like to do that. That's the big thing going forward. So what do you watch out for next? Well, tomorrow, we have the Challenger Job Cut Report. That could be big if we saw a big increase in layoffs. That could be big for the economy, more so than for the Fed, but you're gonna wanna watch that tomorrow. And then of course we get the Jobs Report on Friday. Keep your eyes open for that. Last but not least, check out my podcast, "WSJ's Take On the Week." We cut through the noise to explain the major business and financial news that may move markets. Also, you can make smarter investing decisions. Subscribe wherever you get your podcasts. That comes out every Sunday at 6:00 AM, so be sure and get that. That's gonna do it for us here on "Market Takes." I'm Dion Rabouin, Reporter at The Wall Street Journal. We hope you will join us when we do it again next time.