Jerome Powell Performs Magnificently
Jerome Powell, the head of the US Federal Reserve, succeeded in threading the needle. This time, Powell captured the nuance required to explain the increasingly uncertain path of monetary policy in the future. Earlier this year, Powell unintentionally sparked several rallies in stocks and bonds with his conflicting messages on interest rates.
So, in addition to suggesting that the Fed is about to slow the pace of rate increases, which is a positive for doves, he also said that the rate at which the Fed ultimately settles is likely to be higher than policymakers predicted in September, which is a negative for hawks. A complex message to convey, but one that was clearly understood.
As the Federal Open Market Committee increased its target for the federal funds rate by 75 basis points for the third consecutive time to a range of 3.75 percent to 4 percent, the main challenge, of course, was preparing the financial markets for the impending slowdown in the pace of rate increases. Policymakers correctly worried that a message like this might spark talk of a Fed “pivot” and a new stock and bond market rally, which would have eased financial conditions and undermined their efforts to control inflation. Currently, a “terminal” fed funds rate of 5.10 percent is priced into the swaps market.
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