Markets See Fed Backing Away From A November Rate Hike

It recent weeks, the chances of the Federal Reserve hiking at their next November 1 interest rate decision appear to have diminished, in part, as longer bond yields have risen somewhat. Market expectations currently give a 1 in 10 chance of an interest rate hike in November, and statements from Fed officials in recent days have generally sounded a little more dovish, though not uniformly so.

Prior to this at the Fed’s meeting on September 20, Chair Jerome Powell’s press conference and the Summary of Economic Projections both suggested a relatively even chance of another interest rate hike in 2023. Of course, there still could be another rate hike, but it now seems more likely to come in December than in November, at least according to fixed income markets.

Market Expectations

The expectation of markets as assessed by the CME FedWatch Tool give a less that 10% chance of an interest hike on November 1. That’s down from a roughly 30% chance when the Federal Reserve’s Monetary Policy Committee last met on September 20.

Rising Bond Yields

Though upcoming CPI data will be important, recent jobs data has signaled cooling wage growth, which is something the Fed was hoping for. In addition, yields on longer term Treasury bonds have increased with the 10-year yield now at 4.65% up from 4.5% when the Fed last met to set policy. That may be in response to concerns about U.S. fiscal policy, but still, the Fed sees that move as reducing the need for higher short-term interest rates.

Mary Daly of the San Francisco Fed argued on October 5 that recent tightening in the bond market might be broadly equivalent to single rate hike from the Fed. However, at the time of that statement, the incremental tightening in yields since the Fed’s last meeting was 0.35% compared to closer to 0.15% today, as yields dropped back quite sharply in the days after Daly’s statement.

Recent Fed Statements More Mixed

Beyond Daly’s comment, other recent statements from Fed officials too, have been a touch more dovish. On October 9, Fed Vice Chair Philip Jefferson said. “My view is that the FOMC is in a position to proceed carefully”. And that, “We are in a sensitive period of risk management, where we have to balance the risk of not having tightened enough, against the risk of policy being too restrictive.”

Despite that, Fed Governor Michelle Bowman though did strike a little more hawkish tone expecting another rate increase in remarks on October 7 when she noted that that, “inflation continues to be too high, and I expect it will likely be appropriate for the Committee to raise rates further”. Though she gave no guidance on when further increases might occur.

A December Hike?

As the chance of a November hike apparently reduces, the markets are still giving a 1 in 4 chance of an interest rate hike by December 2023. So the chances of a 2023 interest rate hike may be fading overall, but, within that, a December hike could be more likely than one coming in November.

Fed officials don’t appear to be preparing markets for a November hike, but do still have time to message that a December increase is likely. That said, as the Fed has emphasized moves in monetary policy from here are a lot more finely balanced than earlier in this interest rate cycle. As such, officials may still be looking at the incoming data before they finesse any interest rate moves in 2023, and even then, it may not be a consensus decision. Still, the chance of another 2023 interest rate hike, though possible, does seem to be reducing.