First Trust Economic Research Report
Brian S. Wesbury - Chief Economist
Robert Stein - Deputy Chief Economist
November 2, 2022
The Federal Reserve plans to keep raising rates at future meetings, but at a slower pace than it has for the last four meetings. Today the Fed once again voted unanimously to raise rates by three-quarters of a percentage point – 75 basis points (bps) – bringing the target for the federal funds rate to 3.75 – 4.00%, but far more attention is being paid to the path forward from this point. While today’s statement was not accompanied by updated rate forecasts from the Fed (our next look at the dot plots comes in December), it’s clear a shift is on the horizon.
The Fed statement released today included much of the same text seen following their September meeting, with a few key additions. First, the Fed noted it anticipates ongoing hikes will be appropriate until they have reached “a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.” What level will prove sufficiently restrictive? Nobody – including the Fed – knows. Coming into 2022, the Fed thought that cumulative hikes of 75 basis points (bps) would be enough to quell inflation this year. Then in March it became 175 bps, in June it was 325, and as of September it was 425. During the press conference, Powell said the restrictive level now looks even higher.
The second key addition to today’s statement was a sentence that the Fed will take into account the “lags with which monetary policy affects economic activity and inflation.” In other words, the Fed is moving towards a more measured pace of rate hikes while they wait to see how this year’s actions to-date flow through the system.
These changes set up Powell to clarify during the press conference how they are now thinking about where they need to move on rates, which rests on three questions: how fast, how high, and how long? The Fed has moved quickly to raise rates, after clearly starting late. Now the focus is shifting to the other two questions. How high will rates ultimately have to go and how long will the Fed keep rates elevated to bring inflation into check. While the pace of hikes may begin to slow, they are likely to end higher – and remain there for longer – than was previously anticipated. The fight against inflation is far from done. Today’s actions represent a pivot in how they are approaching the fight.
Our biggest concern is that the Fed continues to ignore the M2 measure of the money supply and not one reporter asked a question on the topic. While Powell was questioned on the topic at a recent conference by the Cato Institute, he brushed the idea off and continued to push the same tired model of inflation that has left the Fed well behind the curve and constantly revising forecasts higher.
The bottom line is that it’s good the Fed has prioritized the fight against inflation, but it remains overly optimistic in the effectiveness of its policies to get inflation under control. Follow the growth of M2 – which has thankfully slowed and must remain low for the foreseeable future – for guidance on the path forward from here.
Text of the Federal Reserve's Statement:
Recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.
Russia's war against Ukraine is causing tremendous human and economic hardship. The war and related events are creating additional upward pressure on inflation and are weighing on global economic activity. The Committee is highly attentive to inflation risks.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 3-3/4 to 4 percent. The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve's Balance Sheet that were issued in May. The Committee is strongly committed to returning inflation to its 2 percent objective.
In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Lael Brainard; James Bullard; Susan M. Collins; Lisa D. Cook; Esther L. George; Philip N. Jefferson; Loretta J. Mester; and Christopher J. Waller.
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This report was prepared by First Trust Advisors L. P., and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.