As widely expected, the Federal Open Market Committee (FOMC) of the US Federal Reserve, unanimously decided to keep the key fund rates at 5.00% - 5.25% for the second consecutive time. The FOMC had last increased the rates in July 2023.
The Committee noted, "Economic activity expanded at a strong pace in the third quarter". It also acknowledged “the tighter financial conditions faced by businesses and households”. Upgrading its outlook for the US economy, Fed Chairman Jerome Powell remarked, “The process of getting inflation sustainably down to 2% has a long way to go”.
After the last meeting in September 2023, the monetary policy statement issued by the FOMC had noted that “credit conditions have tightened” consequent to the eleven consecutive hikes delivered by the Fed. This time, the Committee added “financial” to the credit conditions, noting the rising stress in the financial system as a consequence of rising bond yields.
Caught between the resilient economy and building stress in the financial system, the Federal Reserve seems to have decided to stay on the fringe and let the markets find their equilibrium.
Though, the post-meeting FOMC statement reads, “committee is still determining the extent of additional policy firming” and “The Committee will continue to assess additional information and its implications for monetary policy,” the consensus in the market is leaning towards “a long pause” followed by a series of cuts; assuming the Fed is done with hiking and it will now wait for the market forces to find an equilibrium on prices and growth.
Whitney Watson, co-CIO of fixed income and liquidity solutions at Goldman Sachs Asset Management, reportedly commented it’s likely the Fed will keep its policy unchanged into next year. “There are risks in both directions,” Watson said. “The rise in inflation expectations, owing to higher gas prices, combined with strong economic activity, preserves the prospect of another rate hike. Conversely, a more pronounced economic slowdown caused by the growing impact of higher interest rates might accelerate the timeline for transitioning to rate cuts.”
Post the release of the FOMC statement, the yield on the two-year Treasury, which is more sensitive to Fed policy, fell 12.5 basis points to 4.93%, the lowest level since September 2023. Stocks also rallied with S&P500 and NASDAQ ending the day with over one percent gains.
No comments:
Post a Comment