The Fed has dropped its latest decision on rate hikes. It’s no surprise to the markets: a 75 basis point rate hike, bringing the target Fed Funds Rate to 3.75-4.00.
The Fed did introduce some new language: The Fed will evaluate the cumulative and lagging effect of the pre-existing rate hikes as it seeks to move to a rate that is “sufficient” — What does that mean? The possibility of reevaluating the pace of hikes going forward depending on data.
And there will be plenty of data to digest:
- November 10th: October CPI data
- November 15th: October PPI data
- December 1st: November PCE data
- December 13th: November CPI data
- December 14th: December FOMC
Data from the sources above will shine a light on the strength of the economy, on the jobs market, and on the fight against inflation — three things that are paramount for the Fed now more than ever. Here’s what the market currently expects going forward at the next three meetings:
- December FOMC: 50 basis points (Full Odds: 55% chance of a 50 bps rate hike, 39% chance of 75 bps rate hike, 5% chance of 25 bps rate hike)
- February FOMC: 25 basis points
- March FOMC: 25 basis points
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Upon initial release of the hike, the market was off to the races, receiving the news relatively well, with the Dow moving 418 points higher intraday. However, as is usual when Powell takes the stage, the major indices begun to move erratically as they hung on Powell’s every word.
Here’s what Fed Chair Jerome Powell had to say about the decision, the economy, and the path forward.
Jerome Powell Speaks: 10 Most Important Things Powell Said at the November Fed Meeting
If you’ve ever watched an FOMC meeting before, you know by now that every word Powell utters is carefully calculated. There are no coincidences — even statements that seem to run counter to one another have a purpose. For instance, Powell talks tough as he says the Fed will continue to fight inflation forcefully. At the same time, Powell is indicating in no setting the foundation for a slowing in the pace of rates, when he says, “We don’t need inflation to come down to slow the pace of increases.” These two statements may seem opposite one another, but they have a clear purpose: To telegraph the Fed’s next move without allowing the market to get too comfortable in attempting to front-run the Fed.
If you take nothing else away, here are the top ten most important things that Jerome Powell said during the November FOMC:
- Powell: Expect ongoing increases in rate hikes, but at some point it will be appropriate to slow the pace.
- Powell: “We do need to see inflation coming down decisively. But we don’t need inflation to come down to slow the pace of increases.”
- Powell: “The pace of rate hikes may slow as soon as the December FOMC meeting.”
- Powell: “We’ll be looking at Real rates across the yield curve, as well as other financial conditions.”
- Powell: “We don’t have a clearly identified way of knowing when inflation has become ‘entrenched’. We need to use our tools forcefully but thoughtfully.”
- Powell: “Households have a strong balance sheet.”
- Powell: Housing market was “very overheated” following the pandemic. Powell doesn’t see financial stability issues stemming from the housing sector.
- Powell: “Wages are moving sideways right now. We want to see wages going up, but at a sustainable pace.”
- Powell says that the window for a soft landing has narrowed, but it is still possible to achieve.
- Powell: “Historical record cautions strongly against prematurely loosening policy. We will stay the course until the job is done.”
Breaking Down Fed Speak: Jerome Powell Walks a Tightrope
As Powell attempted to walk the policy tightrope, he noted that the speed of rate hikes has become less important now than it was before. While it’s possible that the Fed must raise rates higher than was anticipated in September, Powell tempered that statement by saying, “We don’t need inflation to come down to slow pace of increases.” This statement was likely a nod to the often-mentioned “lag effect” of rate increases — inflation does need to come down, but it does not need to come down in order for the Fed to reduce the speed of its rate hikes.
Powell also identified that rate hikes may slow as soon as the next meeting, though he clarified that he does not yet believe the Fed has reached a point of overtightening. Powell said that if the Fed does reach the point of overtightening, it can “use its tools” to respond accordingly — a possible nod to the ability of the Fed to move back to cutting rates if things get bad.
Have thoughts about Powell’s commentary? Sound off in Market Rebellion’s FOMC Twitter thread.
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Market Reaction to November FOMC
Source: Google, TradingView, Market Rebellion
With homebuilders falling, earnings season in full swing, and big tech stocks like Amazon and Meta hitting new 52 week lows, it can be easy to feel overwhelmed with the market action. Let us center you: If you’re going to watch only one thing, it should be the 3,900 level in the SPX — a key level of support and resistance in 2022.
Earlier this week we wrote, “On Fed day, it matters more what the market says than what the Fed says.” And we still believe that to be true. The much awaited “pivot language” did come, and yet the market sold off — stopping dead at a key area of resistance in the SPX, the 3,900 level.
A confident and sustained break above 3,900 from here could have signaled that the market was ready to take that next leg higher. Seasonally, it’s a favorable time to do so. Likewise, to confidently remaining below 3,900 would all but confirm the double top and rejection of support on October 28th and November 1st. Judging by the current price action, it looks like the latter. Look for this momentum to dictate price action between today and the next big piece of news: the October CPI (to be released on November 10th).
If core inflation can drop meaningfully in a few key areas, we could see the Fed (which maintains that it will continue to be data dependent) breathe a sigh of relief into markets with a “wait and see” attitude in December. Otherwise, if the CPI comes in hot yet again (as Market Rebellion co-founder believes it will), we’re likely to see markets put on the backfoot once again.
The Bottom Line: Now More Than Ever, Trade with Discipline
No matter what happens, no matter what data is released, we still maintain that the key to staying on top of it all will be to listen to what the market is telling you — not the finance gurus on Twitter, not the fund managers on TV. Watch the levels, make a plan, and follow through.
In other words: Follow your discipline, not your emotions. And remember, no matter what comes from the November economic data, Market Rebellion will be here to cover it all in detail, and to help you the opportunity in any upcoming volatility.