- Fixed Income Analyst
United States, Intermediary
Change
The views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.
As expected, the Federal Open Market Committee (FOMC) increased interest rates by 75 basis points (bps) at its November 2022 meeting, bringing the target federal funds rate to a range of 3.75% – 4.00%. There was no change to existing plans for reducing the size of the US Federal Reserve’s (Fed’s) balance sheet. The FOMC statement included a sentence acknowledging the lagged effect of US monetary policy on the real economy and inflation. During Fed Chair Jerome Powell’s press conference, he suggested that the terminal policy rate for this economic cycle might be higher than he assessed it to be in September, but also that the pace of rate increases will slow in December or early 2023.
The Fed’s challenge
The Fed signaled that it intends to slow the pace of rate increases at upcoming meetings and to maintain the policy rate at the higher terminal level for a prolonged period. Monetary policy typically operates with long and variable lags, and the full impact of recent policy tightening is likely not yet reflected in the real US economy. Additionally, the speed at which the Fed is shrinking its balance sheet is extraordinary and its effects on the real economy, financial stability, and liquidity conditions still unclear.
However, there are early signs that Fed policy tightening is starting to affect economic indicators. US home prices have decreased from their June peak, financial conditions have tightened somewhat, upward pressure on average hourly earnings has eased, and job vacancies may have finally topped out. All of this should give the Fed some comfort with regard to slowing the pace of rate increases going forward. The challenge for the Fed is that while the changes in these economic indicators may be reassuring, their absolute levels remain inconsistent with the Fed’s goals:
- While home prices have fallen off their highs from earlier this year, they remain over 40% higher than pre-pandemic levels.
- Financial conditions have tightened from previously loose levels but are not particularly tight from a long-term historical standpoint.
- Wage increases have stabilized but remain around 5% in annualized terms, which is inconsistent with the Fed’s 2% inflation target.
Looking ahead
The pace of Fed rate hikes from here is likely to depend on the resilience of the labor market. To materially slow the pace, the Fed will need to see moderation in both wage gains and core inflation readings. At present, the labor force participation rate is 62.3%, a full percentage point below pre-pandemic levels, while the unemployment rate of 3.5% is half a percentage point below the FOMC’s longer-run estimate. The October Employment Situation Report, to be released this Friday, will provide insight into the strength of recent wage gains and the likely magnitude of the Fed’s policy move in December.
Additionally, the Fed is likely to remain attentive to market liquidity conditions, given the uncertain impact of quantitative tightening on market functioning. This is apt to be a higher priority following the recent instability caused by the rise in UK government bond yields, which prompted intervention by the Bank of England. Indeed, the Fed has recently released several papers related to financial market stability, including a consideration of “all-to-all” Treasury market trading and research regarding the relationship between monetary policy and financial market stability. While market volatility alone is unlikely to alter Fed policy, material market disruptions could impact the Fed’s balance-sheet reduction plans.
Expert
Related insights
Showing
of
Insights Posts
Income: the hard worker in your portfolio deserves more credit
Continue reading
5
min
Article
2025-03-31
URL References
Related Insights
Stay up to date with the latest market insights and our point of view.
Read next
Showing
of
Insights Posts
FOMC: Stable policy amid market volatility
The Fed is holding steady amid market turmoil. See our quick notes on the FOMC's March policy statement, forecasts, and the Fed chair's press conference.
Quick Take
2025-03-31
Is the US economy really that different since COVID?
US economists have been touting the resilience of the post-COVID economic rebound. Brij Khurana dissects several key economic indicators to see what's really changed since 2019.
Article
2025-03-31
Income: the hard worker in your portfolio deserves more credit
Income from cash is good but income from bonds is better. In a less certain macro environment, Alex King, Supriya Menon and John Mullins think the case for income only gets stronger. How can investors make the most of opportunities?
5
min
Article
2025-03-31
The shifting liquidity landscape: What’s at stake?
The beginning of the end could be in sight for the Federal Reserve’s quantitative tightening (QT) program. US Macro Strategist Juhi Dhawan considers the Fed's next steps and what they could mean for banks, liquidity, and markets broadly.
Quick Take
2025-01-31
Bizarro World: Could 2024 be the opposite of 2023?
Fixed Income Portfolio Manager Brij Khurana details the dynamics that may upend investor expectations of a repeat of 2023 this year.
Quick Take
2025-01-17
Fork in the road: Slowdown or reacceleration ahead?
Markets seem to expect a much smoother ride in 2024, but are they too optimistic? Members of our Investment Strategy & Solutions Group offer their macro and market outlook, including their latest views on equities, bonds, and commodities.
Article
2026-01-31
Fed’s projections yielded mixed results this year — what’s in store for 2024?
Our Fed watcher opines on 2023 policy and looks ahead to 2024.
Quick Take
2024-03-31
Should investors prepare for a rate hike in Japan?
Investment Directors Marco Giordano and Masahiko Loo discuss why a rate rise in Japan may occur sooner than markets expect.
Quick Take
2024-12-31
The US economy in 2024: A tale of transition
Our US macro expert sees changes in consumer and investment spending in the coming year, and highlights what she'll be watching for in terms of policy, politics, and profit margins.
Article
2024-06-30
You snooze, you may lose: The case for bonds
There are signs the Federal Reserve's rate-hiking cycle may be nearing an end, but some uncertainty remains. With that in mind, Multi-Asset Strategist Nanette Abuhoff Jacobson considers the timing of a move from cash to bonds.
Quick Take
2024-11-30
Fed not yet willing to declare victory on inflation
We think the Fed is done raising rates for this cycle, despite the likelihood that they are being overly optimistic about inflation. Read to find out why.
Quick Take
2024-03-31
URL References
Related Insights