Week in Review: November 4, 2022

U.S. markets ended the week lower as hopes that the Federal Reserve would signal smaller rate hikes beginning in December were met with equivocation from Fed Chair Jay Powell. Markets rallied significantly in late October after a Wall Street Journal article suggested the Fed might conclude its November meeting by signaling smaller rate hikes starting in December. While welcomed by the markets, such a notion seemingly contradicted prior statements by Powell in which he said that “The historical record cautions strongly against prematurely loosening policy.” He stressed the need for the Fed to remain aggressive in fighting inflation until it was clearly returning to the Fed’s long-term 2% target; something recent core inflation data indicated was not the case.

As expected, the Fed raised rates on Wednesday by 0.75% for a fourth consecutive meeting. Speaking afterward, Powell acknowledged that “at some point, it will become appropriate to slow the pace of increases… and it may come as soon as the next meeting or the one after that.” The lack of specificity disappointed markets. Markets were further bothered by Powell’s comment that “incoming data since our last meeting suggest that the ultimate level of interest rates will be higher than previously expected.” He added that “the question of when to moderate the pace of increases is now much less important than the question of how high to raise rates and how long to keep monetary policy restricted, which really will be our principal focus.”

Before 2022, “lower for longer” reflected the idea that the Fed would maintain low rates for an extended period to support economic growth. In light of Powell’s post-meeting comments, investors might consider refashioning “lower for longer” to mean that soon future Fed rate hikes will be lower (i.e., smaller) but will occur over a longer period than previously expected.