by Wolf Richter, Wolf Street:
“What I’m trying to do is make sure our message is clear: we think we have a ways to go,” Powell said. “Rates have to go higher and stay higher for longer.”
At every single meeting since the initial baby-step in September 2021, the Fed has pivoted further into the hawkish direction. And it happened again today.
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The FOMC voted unanimously to raise its target for the federal funds rate by another 75 basis points – the fourth rate hike of this magnitude in a row – to a range between 3.75% and 4.0% – unimaginable a year ago. The rate hike was expected, and had been projected by the Fed at its September meeting.
But then during the press conference, Powell pivoted further into the hawkish direction, and repeatedly, and purposefully, and all heck broke loose in the markets, and he kept hammering on it, and concluded with it, to where there would be no misunderstanding and no misinterpretation.
Today’s rate hike was projected at the FOMC’s September meeting in the projection materials at the time. The “dot plot” indicated at the time that the Fed would raise by another 125 basis points by year end: so by 75 points today (done) and by 50 basis points at its December meeting, which would take the upper end of the range to 4.5%.
But today, Powell put the 50-basis-point rate hike in December in question, and said that the Fed may not slow the pace of the hikes in December, which would mean another 75-basis-point hike in December, which would bring the top end of the target range to 4.75% by yearend.
Instead of slowing the pace of rate hikes in December, the Fed may slow it in January, he said. So what would that be, a 50-basis-point hike in January, on top of a 75-basis-point hike in December? That would push the top end of the range to 5.25%. “It’s likely we’ll have a discussion about that,” he said.
“The Committee is highly attentive to inflation risks,” the statement said. “The Committee is strongly committed to returning inflation to its 2 percent objective,” it said. Powell was just a lot more colorful.
The Fed raised all its five policy rates by 75 basis points:
- Federal funds rate target to a range between 3.75% and 4.0%.
- Interest it pays the banks on reserves, to 3.9%.
- Interest it charges on overnight Repos, to 4.0%.
- Interest it pays on overnight Reverse Repos (RRPs), to 3.8%.
- Primary credit rate it charges banks, to 4.0%.
Quantitative Tightening continues at full speed.
QT will continue at full speed as previously outlined. The Fed considers it an important tool in cracking down on inflation, Powell said at the press conference. This is a tacit admission – which must never be spoken out loud during the press conference, neither by the press nor by Powell – that the huge bout of QE had something to do with this raging inflation, and that this huge bout of QE will now have to be undone.
It’s “very premature” to be even thinking about thinking about pausing the rate hikes?
Powell used the word “premature” three times during the press conference in relationship to “thinking about pausing” and “talking about pausing.
“Let me say this, it is very premature to be thinking about pausing. When they hear ‘lags,’ they think about a pause. It’s very premature in my view to be thinking about or talking about pausing our rate hikes. We have a ways to go. We need ongoing rate hikes to get to that level of restrictive,” he said.
Later he said, “Okay, so I would also say it’s premature to discuss pausing. It’s not something that we’re thinking about. That’s really not a conversation to be had now. We have a ways to go.”
Markets began to tank when…
I had the S&P 500 chart running on the same monitor as the live press conference. Everything was going fine, markets were in the green as Powell was reading his prepared statement at the beginning of the press conference. And then, towards the end of his prepared statement, he read:
“At some point, as I’ve said in the last two press conferences, it will become appropriate to slow the pace of increases, as we approach the level of interest rates that will be sufficiently restrictive to bring inflation down to our 2% goal. There is significant uncertainty around that level of interest rates. Even so, we still have some ways to go, and incoming data since our last meeting suggest that the ultimate level of interest rates will be higher than previously expected.”
This phrase was the moment when markets began to tank, it happened instantly. At 2:35 p.m., after he finished reading that line, the bottom fell out, and the S&P 500 dropped 53 points, in just moments, from 3,894 (green) to 3,839 (deep red).
Then he added: “The historical record cautions strongly against prematurely loosening policy. We will stay the course, until the job is done.” And markets tanked some more.
And then he added and repeated all the other stuff, particularly the thingy about it being “very premature to be thinking about or talking about pausing our rate hikes.” And each time, markets tanked some more.
Ultimately, the S&P 500 ended the day down by 2.5%. And the Nasdaq Composite ended the day down by 3.4%.
Some of Powell’s delectable morsels at the press conference.
How fast, how far (“to higher levels than we thought at the September meeting”), for how long. “The tightening program is addressing three questions,” he said: “The first is, how fast to go. The second is, how high to raise our policy rate. And the third, how long to remain at a restrictive level.”
“So on the first question, how fast to tighten policy. It has been very important that we move expeditiously, and we’ve clearly done so. We’ve moved 3 3/4 percentage points since March, from zero. That’s a fast pace and certainly appropriate given the low level from which we started.”
