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October ended without any tricks, just a treat. As expected, the Federal Reserve voted unanimously to keep the benchmark interest rate unchanged at the current range of 5.25% to 5.50%. The pause was the second in a row and has many Fed watchers believing it may be the end of the current rate increase cycle. This doesn’t mean the Fed is ready to lower interest rates. In fact, Federal Reserve Chair Jerome Powell was quick to point out that the committee is not even thinking about rate cuts. The Fed remains committed to “returning inflation back to 2% and keeping longer term inflation well anchored.” Powell told the room of reporters the Fed will continue to proceed carefully as it weighs all incoming data to determine its next move. The question the committee asks itself at each meeting is if it is “achieving a restrictive enough policy to bring inflation down over time.
Analysts judged the meeting as a hawkish pause leaning towards dovish. Powell diminished the importance of September’s dot plot, where most members leaned towards another hike this year, by saying the opinions are just a reflection of a point in time and the forecast changes with time. When asked if the pause this time suggests the end to rate hikes, Powell simply said “slowing down is giving us a better sense of how much more we need to do, if we need to do more.” The Fed believes there are lag effects with rate hikes, which are difficult to calculate. Powell acknowledged that some effects of last year’s rate hike are being felt now but others have not been felt, such as the rollover of debt. While the Fed is keeping its options open, the financial markets have decided we may have seen the last of the rate hikes.
Key Indicators this Week
Jobs – The October job report surely made the Federal Reserve committee members smile and give themselves a pat on the back. Everything the Fed is trying to achieve came together in October. The U.S. added 150,000 jobs in October, a bit less than expected but still considered a respectable addition. The large gain in September was, not surprisingly, adjusted lower from 336,000 to 297,000. The unemployment rate increased slightly from 3.8% to 3.9%, the highest level since January 2022. Wages moderated a bit at both the monthly and annual levels. The data doesn’t represent a dramatic shift in the labor market, but rather what an economist might call a gradual move to a softer, more balanced playing field. This is exactly what the Fed has been hoping for as it works to bring down inflation.
ISM – The Institute for Supply Management’s manufacturing gauge unexpectedly fell in October. The measure of factory activity fell to 46.7, the lowest level in three months and the12th month under 50, the division between expansion and contraction. Employment levels dipped back below 50. On a positive note, prices paid remained under 50 for the sixth month, suggesting factories are managing to keep pricing under control. While some believe the overall gauge’s pullback in October can be attributed to the UAW strike, 13 of the industries surveyed reported weaker activity as demand for goods remains soft. The weakness in October brought an end to three months of progress, leaving activity near the lowest levels since the pandemic.
Week Wrap-up – The financial markets shifted dramatically this week as the “no more rate hikes” theme gained ground with investors. Treasury yields fell 14 to 31 basis points across the curve in one week. Key stock indices posted the best weekly performance in a year.
Sarina Freedland – Senior Investment Officer
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