Despite rumors of a dovish pivot, the Federal Reserve passed an additional 75-basis-point interest rate hike at Wednesday’s Federal Open Market Committee meeting (FOMC). The question remains: Is this the last rate hike of the year? Or will the Fed opt to raise rates again at its December meeting?
Well, the central bank’s tightening campaign didn’t quite reach its end with Wednesday’s hike but, as per comments from Fed Chairman Jerome Powell, could be approaching its terminal rate.
“As we come closer to that level and move further into restrictive territory, the question of speed becomes less important. … And that’s why I’ve said at the last two press conferences that at some point it will be important to slow the pace of increases. So that time is coming, and it may come as soon as the next meeting or the one after that. No decision has been made.”
Notions of a tightening slowdown have been prominent since the September Consumer Price Index (CPI) came in better than expected. Indeed, while prices were still up 8.2% annually, the figure was an improvement from August’s 8.3% CPI figure.
Unfortunately, it seems the Fed is keeping course with its target of 2% inflation, regardless of fears of an over-tightening. Chair Powell was indisputably hawkish on Wednesday, feeding into narratives that there may well be an additional round of rate hikes in December. In fact, Powell had to backtrack somewhat and reiterate that the Fed has “a ways to go” before ceasing its rate hikes.
“Incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected … It is very premature to be thinking about pausing. People when they hear ‘lags’ think about a pause. It is very premature, in my view, to think about or be talking about pausing our rate hikes.”
Markets Drop on Hawkish Fed Comments
Fed meetings are always notable for their immediate and long-term effects on stocks and other investments. In that regard, the central bank’s latest meeting yielded a predictable stock market stumble.
The Dow Jones Industrial Average fell 1.5% Wednesday, while the S&P 500 and Nasdaq Composite closed down 3.5% and 3.36%, respectively, virtually wiping the indices’ recent gains. Reasonably so, as most financial operators came away from the meeting only more cautious over the impact of further rate hikes.
“The tone of Fed Chair Jay Powell’s comments was quite hawkish, which means the Fed still has a way to go to fight inflation, and the level of interest rates will be higher than previously expected,” Jack McIntyre, portfolio manager at Brandywine Global, told CNBC. “There were no hints of dovishness to indicate the Fed may be poised to pause.”
Tech stocks were perhaps the biggest losers of Wednesday’s selloff. Companies like Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX) and Meta (NASDAQ:META) each slid more than 4%, while Tesla (NASDAQ:TSLA) lost nearly 6% of its share price. Many of these high-growth companies are highly leveraged, meaning much of their operations are funded via debt. Higher interest rates will only add additional margin pressure to the already constrained businesses, explaining the selloff following the Fed meeting.
Interestingly, following the Fed decision, trades of the S&P 500 Exchange-traded Fund (ETF) (NYSEARCA:SPY) skyrocketed in volume. After enjoying a relatively quiet trading volume of 34 million shares until 3:00 p.m Eastern, trades of SPY skyrocketed to 100.3 million.
Will There Be a Fed Rate Hike in December?
The December FOMC meeting may well write the script heading into 2023. Whether the Fed decides to continue hiking rates by its favored 75 basis points, slims down to 25 or 50 basis points, or opts to forgo raising rates altogether, will likely set the tone for equity markets in the new year.
To that end, the October and November inflation reports will inform whether the central bank continues its hawkish agenda. Indeed, core CPI data is set to release next Thursday, Nov. 10. While the Fed has a long-stated preference for the more timely and accurate Personal Consumption Expenditures (PCE) report, the CPI tends to be the more popular metric for many analysts by way of its quicker publication.
The Cleveland Fed currently projects annual inflation in the October and November CPI reports to come in at 8.09% and 8.07%. Should the estimates prove accurate, it would be a promising sign that the Fed’s tightening efforts thus far have been effective. While the CPI is somewhat of a lagging indicator, even a minor improvement could manifest substantial price level drops in the months ahead.
Yung-Yu Ma, chief investment strategist at BMO Wealth Management, believes the Fed’s overly cautious agenda will push the central bank toward further tightening.
“Chairman Powell made it clear that his bias is to err on the side of over-tightening rather than under-tightening in order to avoid the risk of inflation becoming entrenched. At the end of the day, it’s going to come down to inflation and labor market data in the coming months and quarters. The Fed’s outlook may be less one-sided, but reaffirming its bias to fight hard against inflation — and the 2% inflation target — is likely to remain a market headwind until inflation conditions improve.”
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
