Fed opens door to smaller interest rate rises

The US Federal Reserve (Fed) raised rates by 75 basis points (bps) for the fourth meeting in a row and said it would continue to reduce its balance sheet, in the process known as “Quantitative Tightening”. However, the statement accompanying the latest meeting of its Federal Open Market Committee (FOMC) rate setting committee signalled it is thinking about slowing the pace of future rate increases.

The accompanying statement read: “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”.

This is new and in noting that the Fed had now raised rates by 3.75% this year, Chair Powell reiterated in the press conference following the statement that at some point it will be appropriate to slow the pace of tightening. However, so that no one could become too excited about an impending pivot in monetary policy he said they have some way to go and that the ultimate level of rates could be higher than previously expected.

In the Q&A session Powell added that the recent strength of the CPI and employment releases had led him to that view.  This opens the door to a smaller rate rise in December, say 50 bps, but the tone of the press conference means it will require softer readings on inflation and the labour market. There will be two prints of each of these variables before the next Fed decision on 14 December. It would seem that the Fed has turned off the autopilot, but remains to be convinced that it has reached its destination.