- Laith Atra
Pivoting Away From Expectations
Updated: Nov 7, 2022
All Federal Open Market Committee, or FOMC, meetings are economically and financially significant. However, taking into consideration the desperate cries for a pivot coming from speculators, retail investors and institutions alike leading in the lead-up to Wednesday's FOMC meeting, perhaps this FOMC meeting may have been slightly more important than others.
The notion of a pivot may be slightly unclear to some readers. However, as outlined by all Street Journal reporter, Nick Timiraos: "A pivot can refer to a shift from deflationary monetary policy, such as hawkish rate hikes to bring down inflation, to dovish expansionary rate cuts designed to stimulate the economy". Pivoting may also refer to holding rates at a given high level or slowing down rate hikes alongside a deceleration of quantitative tightening. On this occasion, investors were hoping for the latter. The general fear in the markets is that the Fed is raising rates too much and too fast, stunting economic growth and negatively affecting portfolio values.
The Fed ended up raising the target range for the federal funds rate by 75bps to 3.75-4% in order to meet their core mandates of minimal unemployment and to bring inflation down from its staggering highs of 8.2%.
Initially, the market responded positively to this announcement. The CME FedWatch tool, which gauges the likelihood of a change to the federal fund's target rate based on interest rate traders, had the odds of a 75bps hike at an 86.2% probability the day before the meeting. One could assume the hike would have come as no surprise to traders and be priced in, which partially explains the subsequent rally upon the release of the statement. This excitement unfortunately did not last very long.
A short while after the announcement, Fed Chairman Jerome Powell made a statement. He acknowledged the US's economic slowdown, with falling consumer spending growth, the weakening of housing market activity, and the reduction in investments. He then proceeded to talk about inflationary pressures currently exacerbated by the ongoing conflict in Ukraine and how it may take a significant amount of time before inflation relents under decreased economic activity. Moreover, given the tight labour market in the US, the Fed must focus its efforts on a more hawkish approach. Non-Farm Payroll numbers, a measure of job growth, beat expectations by a significant margin, with 261,000 jobs added last month, 66,000 above the estimate. Market momentum was very much downwards from this point onward, with indices reversing from the day's highs, continuing through Powell's Q&A as he clarified the day's release to journalists.
While we know that a pivot will eventually come, investors may be correct in jumping the gun to capture the most returns on the eventual move upwards. It seems however that it was a little premature this time. Until inflation is clearly on its way down or unemployment massively increases, we probably will not see a pivot from the federal reserve. Until then, everyone will be waiting with bated breath for whatever narrative the market spins up, leading to the next FOMC meeting.
Cover Image sourced from Reuters