Fed Hints It Might Slow the Pace of Future Rake Hikes

For the fourth time in a row, the Federal Reserve hiked its baseline interest rate by another 75 basis points. Given ongoing conditions and its determination to drive inflation down to the 2% figure it considers desirable, there was little doubt what yesterday’s announcement would be.

“Recent indicators point to modest growth in spending and production,” read the Fed’s press release after the conclusion of its November meeting of the Federal Open Market Committee, or FOMC. 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.”

In addition, Russia’s war against Ukraine and related events, like pressures on energy prices and disruptions of important foodstuffs that have affected supply chains, “are creating additional upward pressure on inflation and are weighing on global economic activity.”

Then there was the uptick of open jobs to 10.7 million, partially offsetting the drop in August, according to the Bureau of Labor Statistics. Drops are the type of news the Fed has sought, along with an increase in unemployment. But a separate BLS report noted, “Unemployment rates were lower in September than a year earlier in 354 of the 389 metropolitan areas, higher in 27 areas, and unchanged in 8 areas.”

However, the Fed has been fielding a growing amount of criticism. One major complaint has been that it takes months for rate changes to percolate through the economy and have their expected effect. By continuing to add on increases, the Fed has run the risk of continuing action when it doesn’t know what the ultimate effect will be, resulting in something called a positive feedback loop in engineering and control theory. That’s like driving a car, hitting a skid on a watery or icy surface, then turning the way the car is shifting, potentially creating a 360-degree spin.

So, a notable part of what the Fed released yesterday was the following sentence: “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.”

It was the first indication that the Fed might slow down the pace of future rate hikes to better calibrate the results of what they have done so far. But there’s no public timetable.

“The real question investors are looking for answers to is the timing around when the Fed will slow the pace of rate hikes and Chairman Powell will attempt to tiptoe around the topic as much as possible,” wrote Charlie Ripley, senior investment strategist for Allianz Investment Management, in an emailed note. “For now, the Fed has reiterated the status quo in that the main objective is to see “evidence” of inflation slowing, but the reality is they have to start accounting for the inherent lag that occurs between monetary policy decisions and its effect on the economy.”

And there was also this reminder of what else could happen: “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.”