- Fixed Income Analyst
United States, Institutional
Change
The views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.
As expected, the Federal Open Market Committee (FOMC) increased interest rates by 75 basis points (bps) at its November 2022 meeting, bringing the target federal funds rate to a range of 3.75% – 4.00%. There was no change to existing plans for reducing the size of the US Federal Reserve’s (Fed’s) balance sheet. The FOMC statement included a sentence acknowledging the lagged effect of US monetary policy on the real economy and inflation. During Fed Chair Jerome Powell’s press conference, he suggested that the terminal policy rate for this economic cycle might be higher than he assessed it to be in September, but also that the pace of rate increases will slow in December or early 2023.
The Fed’s challenge
The Fed signaled that it intends to slow the pace of rate increases at upcoming meetings and to maintain the policy rate at the higher terminal level for a prolonged period. Monetary policy typically operates with long and variable lags, and the full impact of recent policy tightening is likely not yet reflected in the real US economy. Additionally, the speed at which the Fed is shrinking its balance sheet is extraordinary and its effects on the real economy, financial stability, and liquidity conditions still unclear.
However, there are early signs that Fed policy tightening is starting to affect economic indicators. US home prices have decreased from their June peak, financial conditions have tightened somewhat, upward pressure on average hourly earnings has eased, and job vacancies may have finally topped out. All of this should give the Fed some comfort with regard to slowing the pace of rate increases going forward. The challenge for the Fed is that while the changes in these economic indicators may be reassuring, their absolute levels remain inconsistent with the Fed’s goals:
- While home prices have fallen off their highs from earlier this year, they remain over 40% higher than pre-pandemic levels.
- Financial conditions have tightened from previously loose levels but are not particularly tight from a long-term historical standpoint.
- Wage increases have stabilized but remain around 5% in annualized terms, which is inconsistent with the Fed’s 2% inflation target.
Looking ahead
The pace of Fed rate hikes from here is likely to depend on the resilience of the labor market. To materially slow the pace, the Fed will need to see moderation in both wage gains and core inflation readings. At present, the labor force participation rate is 62.3%, a full percentage point below pre-pandemic levels, while the unemployment rate of 3.5% is half a percentage point below the FOMC’s longer-run estimate. The October Employment Situation Report, to be released this Friday, will provide insight into the strength of recent wage gains and the likely magnitude of the Fed’s policy move in December.
Additionally, the Fed is likely to remain attentive to market liquidity conditions, given the uncertain impact of quantitative tightening on market functioning. This is apt to be a higher priority following the recent instability caused by the rise in UK government bond yields, which prompted intervention by the Bank of England. Indeed, the Fed has recently released several papers related to financial market stability, including a consideration of “all-to-all” Treasury market trading and research regarding the relationship between monetary policy and financial market stability. While market volatility alone is unlikely to alter Fed policy, material market disruptions could impact the Fed’s balance-sheet reduction plans.
Expert
Related insights
Showing
of
Insights Posts
Rate relief: Fed cuts half point, but says “economy is strong”
Continue reading
3
min
Article
2025-09-30
URL References
Related Insights
Stay up to date with the latest market insights and our point of view.
Read next
Showing
of
Insights Posts
What is “the economic cycle,” anyway?
See why the relationship between asset prices and the economic cycle is more complex than you might think, why a US recession is unlikely, and what a more dovish Fed could mean for the US and global markets.
5
min
Article
2025-10-31
Take it “ease”-y
Tim Antonelli, Head of Multi-Asset Strategy – Insurance and Portfolio Manager, explains why he thinks insurers should consider locking in current yields and sticking with global equity exposure.
18
min
Article
2025-10-31
Can central bank independence survive?
Can central bank independence survive? Macro Strategist John Butler discusses the challenges faced by central banks in an increasingly fraught political environment and how investors should adjust.
5
min
Article
2025-09-30
Sahm rules are meant to be broken
Fed easing is finally here and fundamentals remain favorable. But what about that election? Members of our Investment Strategy & Solutions Group offer their outlook, including their latest views on equities, bonds, and commodities.
12
min
Article
2025-10-31
Rate relief: Fed cuts half point, but says “economy is strong”
Our expert explains the Fed's bold rate cut and some key takeaways for investors.
3
min
Article
2025-09-30
Time to capitalise on the evolving role of bonds?
We outline why we think the new economic era is elevating the role of bonds as a source of attractive and stable income, downside protection and portfolio diversification.
2
min
Article
2025-09-30
Walking a mile in Fed Chair Powell’s shoes
A slow roll on rate cuts by the Fed could frustrate markets and lead to more volatility ahead of the September FOMC meeting. See our take on what to expect for the next few weeks.
4
min
Article
2025-08-31
Still waiting…Fed wants more data before cutting policy rates
Our expert dives into Fed policy following the July FMOC meeting.
3
min
Article
2024-10-31
When the Fed sneezes, the ECB… cuts rates regardless?
Since the late 1990s, when the US cycle turned, the rest of the world generally followed, with a lag. However, the new economic era is likely to result in greater cyclical divergence between countries and the need for different central bank responses. How should investors think about the age of economic divergence?
7
min
Article
2025-03-21
June FOMC meeting: May disinflation is welcome, but is not enough for a rate cut
Fixed Income Analyst Caroline Casavant discusses what June's FOMC meeting tells us about the US Federal Reserve’s latest thinking on interest-rate cuts.
3
min
Article
2025-06-30
URL References
Related Insights
The real issue on rate cuts? Keep your eyes on the dot (plot)
Keep your eyes on the Fed's 2025 dot plot. The real story is where policy rates are headed, not just the next rate cut.
By
Brij Khurana