Minutes regarding the Market Committee’s (FOMC) policy assembly held over September 19-20, would be released at 18:00 GMT today. These minutes are anticipated to shed light on the Committee members’ assessments regarding the prevailing monetary policy framework.
In the course of the September convening, the FOMC opted to uphold the federal funds rate in the bracket of 5.25% to 5.5%, as it was expected by the financial community. The Federal Reserve hiked rates eleven times during this tightening cycle.
Higher rates for a prolonged period of time seems to be the message to expect but the financial community is pricing in the derivatives market two things:
The first is that the rate hiking cycle reached a zenith, accordingly to the FedWatch Tool.
The second is that rates are expected to be lowered by 25 basis points not before the June 2024 FOMC meeting.
There are however some domestic and external factors as well that could change expectations. The domestic real estate market is facing high mortgage rates combined higher cost of residential real estate. The spread of the 30 year mortgage rate, now at 8% vs 10 year US Treasuries at 4.78%, is near record level.
While FED Chair Jerome Powell does not say he expects a soft landing, as it would be an excess of confidence, several FOMC members mention scenarios matching with a soft landing de facto accepting it without confirming it.
They’re expecting the economy to slow down a bit next year to around 1.5%, from 2.1% this year. The unemployment rate isn’t expected to climb higher than 4.1%, according to the latest quarterly roundup. That’s just a tiny bit higher than the 4% rate they think can keep going for the long haul, and only a little above the current 3.8% rate.
In the international markets energy prices rose and are not expected to retrace due to geopolitical tensions in middle east. Crude Oil was heading to 80$/barrel but on Sunday evening made a gap up above 85. Natural gas is consolidating above 3$/BTU and its rally has just started, accordingly to several analysts.
One of major risks is stagflation, and hiking rates more would accelerate the chances for a recession next year. Millions of Americans will start getting student-loan bills again this month and if we add the United Auto Workers strike to the already mentioned higher energy prices combined with higher rates the idea that a soft landing is only anticipating a more severe recession does not appear an unlikely scenario.
The Federal Reserve, confident to have faced without any major consequences the most serious banking crisis since 2008, with stock indices not very far away from their record highs, would need to make though choices in the next months and perhaps giving more weight to the “maximum employment” part of its mandate, before to face higher prices and unemployment rates at same time.
A rate cut before June and postponing deleveraging of its balance sheet is a possible scenario if consumption (which account for circa 70% of US GDP) and the international macro framework would see a deterioration during this quarter.
