The Beginning of the End (of Fed Hikes)

By Nicholas Jasinski Wednesday, February 1

Steady Goes It. The Federal Reserve's policy committee increased interest rates by a quarter point today, as it continues the fight against inflation. No big surprise there.

It was the smallest hike since last March, and takes the federal-funds rate to a target range of 4.50% to 4.75%.

As for what comes next, there was plenty for both the doves and the hawks to point to in the Federal Open Market Committee's statement this afternoon and in chairman Jerome Powell's remarks that followed. 

"The disinflationary process has started," Powell said, referring to a slowing in the pace of inflation (that's distinct from deflation, which means falling prices).

Powell was speaking in particular about easing inflation in goods prices, which make up about a quarter of the core personal consumption expenditures price index, the Fed's preferred inflation gauge. That was up 4.4% in the year through December.

Housing is the next driver of inflation to start to roll over, Powell said, as higher mortgage rates take a bite out of buyer demand and new rental leases are signed. Disinflation in prices of core services excluding housing, which are closely tied to wages, is the missing ingredient.

"While recent developments are encouraging, we'll need substantially more evidence to be confident that inflation is on a sustained downward path," Powell said.

Ditto for the labor market, which has delivered slowing job gains over the past few months, but remains out of balance. This morning's Job Openings and Labor Turnover Survey, or JOLTS, for December showed an increase in unfilled positions: the ratio to end 2022 was 1.9 open jobs per unemployed worker.

But progress is progress. Considering the cumulative tightening of monetary policy over the past year and the lags with which the Fed's moves affect economic activity, slowing down the pace of hikes was the right move today, Powell explained.

To be sure, there are still further increases to come.

"Shifting to a slower pace will allow the committee to better assess the economy's progress toward our goals as we determine the extent of future increases required to attain a sufficiently restrictive stance," Powell said. "We will continue to make our decisions meeting by meeting, taking into account the totality of incoming data and their implications for the outlook for economic activity and inflation."

The Fed chair repeated his determination to avoid the mistakes of the stop-and-go monetary policy of the 1970s that lost control of inflation for the better part of a decade. This time, in order for the data-dependent Fed to pivot, it will take emphatic evidence from monthly indicators that plus-2% inflation has been vanquished

The overall picture was of a Fed that's not done yet but is clearly at the beginning of the end of its tightening cycle.

Ultimately, investors were pleased with the Fed's rate decision and commentary. Stocks rallied in the afternoon, led by growth sectors, to reverse the morning's losses. The S&P 500 closed up 1%, the Nasdaq Composite added 2%. The more valued-oriented Dow Jones Industrial Average finished about flat.

As for the past few months' rise in stock prices and decline in bond yields—an easing of financial conditions—Powell pointed to the overall tightening compared with a year ago and said he wasn't concerned by short-term moves in markets.

DJIA: +0.02% to 34,092.96
S&P 500: +1.05% to 4,119.21
Nasdaq: +2.00%  to 11,816.32

The Hot Stock: Advanced Micro Devices Financial +12.6%
The Biggest Loser: WestRock -12.7% 

Best Sector: Technology +2.4%
Worst Sector: Energy -2%