Smaller U.S. Rate Hikes Coming…But A Higher Terminal Rate On Tap?

 | Nov 03, 2022 04:20AM ET

The market had a 75 basis point (bp) interest rate hike priced in for weeks, and not surprisingly, that’s exactly what the central bank delivered. Therefore, we haven’t seen much market movement from the interest rate decision itself, but there are still some key nuggets for traders in the accompanying monetary policy statement and Chairman Jerome Powell’s ongoing press conference.h2 FOMC monetary policy statement/h2

There was only one substantive change to the FOMC’s monetary policy statement, but it was a doozy. Traders were on edge and ready to read between the proverbial lines for any hint of a downshift to slower interest rate hikes, but as it turns out, the central bank came out and stated it was considering such a move explicitly.

The FOMC added the following sentence to its monetary policy statement: “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 other words, the Fed is finally acknowledging its aggressive tightening over the last six months will take time to influence the underlying economy and that it may soon shift toward rate hikes of 50bp, 25bp, or even outright pause interest rate increases to see how the economy develops. Furthermore, the fact that this comment was in the joint statement, rather than just noted in the press conference, suggests that it is close to a consensus view and less likely to be discarded regardless of how economic data comes out in the coming weeks.