MNI: Fed Holds Rates, Doesn't Close Door To More Hikes

Federal Reserve officials left interest rates on hold at 22-year highs for a second meeting in a row Wednesday, but also did not rule the possibility to additional tightening later this year or next year if inflation proves more stubborn than expected.

Fed policymakers have made clear the bar is increasingly high for more rate increases despite a raft of strong economic data, as they wait for the lagged effects of past hikes to create a greater drag on growth and inflation.

Officials are also keenly watching tighter financial conditions resulting from sharply higher long-term bond yields, which some say reduce any need for further tightening.

“Tighter financial and credit conditions for households and businesses are likely to weight on economic activity, hiring and inflation,” the FOMC said in its statement, which notably added the word “financial” as a nod to the recent spike in 10-year yields to their highest levels since 2007.

The committee repeated that it would keep in mind the cumulative effects of tightening and its lags in “determining the extent of additional policy firming that may be appropriate.”

ROSY BACKDROP

Since the Fed's last meeting, the government reported GDP grew a whopping 4.9% in the third quarter while the economy created more than 300,000 jobs in September. The disinflation trend seen for most of this year also showed signs of slowing, with the September PCE inflation posting its fastest one-month gain since April.

The Fed's September Summary of Economic Projections showed officials still penciling in one additional rate increase for this year. Fed Chair Jerome Powell will answer questions from reporters at a post-meeting press conference -- including whether he thinks one further rate increase is still likely needed.

The FOMC started raising rates in March 2022 under sharp criticism from economists who believed they had fallen behind the curve given the amount of fiscal and monetary stimulus delivered after the pandemic. The central bank moved quickly to make up ground, raising rates by 525 basis points in under 18 months to a 5.25-5.5% range, the highest since 2001.

In the past few months, markets have become more worried about rising Treasury supply and the Fed's pledge to keep interest rates higher for longer. That has sent the yield on the 10-year note to near 16-year highs of 5%.