Our Views
I think Powell was a lot more dovish than he was in September. I view it as a positive that Powell doesn’t expect a recession, nor does the Fed need one to achieve their goals. However, they do want to see subpar growth because they think that’s how you can sustain low inflation.
Powell also reminded us that wages aren’t the driver of inflation, so you don’t need to break the labor market to achieve 2% inflation. But you do want to see wage pressure slow, and I think that’s what’s been tracking so far.
Powell emphasized several times that consumer inflation expectations are in a good place, despite gasoline prices being higher. I think it’s important to remind ourselves of that.
Bottom line is that the Fed is in a place to evaluate the data to see if the move in rates is allowing inflation to fall back to the target in a sustainable way. And we think that this is what’s happening.
I thought it was under-reported that yesterday’s pause in rate increases was by unanimous decision, because when you read the September FOMC minutes, there was clearly a growing division within the committee. I think Powell worked very hard to get to unanimous; there are clearly some more hawkish people on that committee, and he was able to persuade them.
This might be getting a little too nuanced or semantical, but I also think it was notable that he repeatedly used the phrase “we’re not confident”. For example, when he said, “we are not confident that we haven’t and we’re not confident that we have [tightened financial conditions sufficiently.]” To me, using that phrase creates a lot of doubt about what they will do in the future.
I also think it was significant that the staff did not put the chance of a recession back into their outlook, and he said that the staff did not forecast a recession. I don’t think a rate hike is completely off the table, but barring some disastrous news materializing, I think it’s about as close to being off the table as he can take it [because] he’s got some hawkish members, and he doesn’t want to give them a reason to deviate from the Fed’s messaging.
Another pause as FOMC responds to trajectory of inflation
The penultimate FOMC meeting of 2023 was preceded by some dovish Fedspeak in October. For example:
- Atlanta Fed President Raphael Bostic told the American Bankers Association, “I think our policy rate is in a sufficiently restrictive position to get inflation down to 2%,” suggesting, “I actually don’t think we need to increase rates any more.”
- Philadelphia Fed President Patrick Harker told members of the Delaware State Chamber of Commerce that, “Absent a stark turn in what I see in the data and hear from contacts ... I believe that we are at the point where we can hold rates where they are.”
- Dallas Fed President Lorie Logan said, “If long-term interest rates remain elevated because of higher term premiums, there may be less need to raise the Fed funds rate.”
By the end of October, the market had come to a near-unanimous conclusion that the Committee would pause rate hikes for a second consecutive time on November 1, just as it did on September 20. Once again, the FOMC confirmed this consensus prediction, leaving the target at 5.25%-5.50%.
In our view, much of the November FOMC meeting was a confirmation of our research since the beginning of the year. Throughout 2023, Fundstrat Head of Research Tom Lee has argued that inflation is on a glidepath lower, that the indicators used by the Fed will eventually catch up to and align with the real-time data showing this slowing inflation, and that labor pressures are easing. Lee has also repeatedly pointed out that, contrary to the fears of the bearishly inclined, the economy has remained resilient enough to avoid a recession this year.
The FOMC press statement, as well as Fed Chair Jerome Powell’s prepared remarks and his responses during the subsequent question-and-answer session, hewed to all of these longstanding assertions by Fundstrat. In line with his remarks after previous meetings, Powell again noted that, “inflation has moderated since the middle of last year, and readings over the summer were quite favorable.” He also spoke about how the labor market was “continuing to broadly cool off and achieve a better balance,” echoing the press statement’s acknowledgement that job gains had “moderated.”
Powell also mentioned the “risk that expectations of higher inflation get entrenched” before noting approvingly that, “it is just clear that inflation expectations are in a good place. The public does believe that inflation will get back down to 2% over time, and it will. They are right.”
Lee found this particularly noteworthy. As he explained, “the last thing [FOMC members] want is consumers to expect inflation, as that allows companies to get away with higher prices.”
Looking forward, Fed funds futures trading after the meeting showed the market lowering the odds of a December hike by a full 800 bp, to around 19%. Lee attributes this to Fed officials emphasizing the importance of patience in light of the progress we’ve already seen in lowering inflation. Said Lee, “It’s encouraging that they’re beginning to realize that the trajectory of inflation is falling.”
