The reference rate remains at its highest level in 22 years
Since the last monetary policy meeting in September, when the Committee chose to keep rates unchanged, the data have shown a robust employment performance and economic growth stronger than expected. Additionally, inflation has improved, albeit at a slower pace, remaining above the target. In this context, in a decision widely anticipated by the market, the Fed once again maintained the target range for the reference rate at 5.25% – 5.50%, the highest level in 22 years. The decision was unanimous.
The statement reflected language very similar to that of September, reaffirming that, in determining the degree of additional monetary policy tightening that may be appropriate to eventually bring inflation back to 2%, the Committee will take into account all the measures that have been implemented so far, as well as the lags with which monetary policy impacts economic activity and inflation, along with the development of economic and financial factors. The Committee will continue to evaluate additional information as it emerges and its implications.
On the other hand, the statement reiterated that ‘tighter financial and credit conditions for households and businesses are likely to exert pressure on economic activity, employment, and inflation. The magnitude of these effects remains uncertain.’ This paragraph refers to the recent tightening environment, especially marked by the sharp spike in Treasury bond yields. These tighter conditions could lead to no change in the reference rate at the next meeting in December as well. So far, this rate scenario is the prevailing market expectation.
During his press conference, Jerome Powell emphasized that inflation has improved. However, he stressed the importance of evaluating more data, indicating that there is still a long road ahead. In this regard, the Fed remains steadfast in its commitment to achieving its 2% inflation target. Powell also reiterated that, to reach this target, it may be necessary to accept economic growth below its potential and a slowdown in job creation. Moreover, on other issues, he noted that, so far, he is not confident that financial conditions are sufficiently restrictive, leaving open the possibility of further rate increases if necessary.
Probabilities for the reference rate target for next December 13
Source: CME Group