Fed shifts towards more flexible stance

The US central bank appeared to take a page out of the European Central Bank's playbook, telling investors that it would begin to take into account the cumulative effect of policy to date and its lags.

Investors interpreted the new wording of its policy statement as dovish.

According to the Federal Reserve, economic data pointed to "modest" growth in spending and production and job gains over recent months had been "robust", while inflation was still "elevated".

Yet in future, the Federal Open Market Committee said in its policy statement that in future it would take into account three factors.

The factors listed were the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.

Previously, it had simply said that "ongoing increases in the target range will be appropriate".

Nonetheless, as had also been anticipated, the target range for the Federal Funds rate was hike by 75 basis points to 3.75-4.0%.

At his presser, Fed chairman, Jerome Powell, went on to say that "[we] need to see inflation coming down decisively" and that "we think that there is still some ground to cover".

He also emphasised that the level to which rates would need to rise was "highly uncertain", but that the question of speed was less important as one began approaching such levels.

How long to keep rates restrictive was also quite important, he added.

Powell did nevertheless expressly say that a 50bp or 75bp hike in December was possible, so that a bit slower pace of tightening was possible in December or at the meeting after that with no decision having yet been taken.

The Fed chief also explained that if inflation were not brought under control, then inflation might become entrenched, leaving it without room to help and would lead to high costs in terms of unemployment, hence the current approach made most sense from a risk management perspective.

It is "very premature" to talk about a pause "we have a ways to go".

In response to Powell's remarks, as of 1922 GMT, Wall Street's main market gauges were at their session lows with the S&P 500 down by 1.53% to 3,796.43 and the Nasdaq Composite by 2.24% at 10,645.19.

Nevertheless, some market commentary noted that several of Powell's hawkish comments were in response to a reporter's question regarding what he thought of the stock market's positive response to his presser, when stocks were in fact mostly lower.

The yield on the benchmark 10-year US Treasury meanwhile was up by five basis points to 4.095% and the US dollar spot index was drifting lower by 0.1% to 111.37, having spiked lower to 110.43 towards the start of his speech.

Fed futures were left pricing in a 41.8% probability of a 75bp interest rate hike at the FOMC's 14 December meeting, or about 10 percentage points less than before the announcement.

Futures further out responded too, with those for the 14 June 2023 FOMC meeting left pricing in a roughly 68% probability of a further hike in the target range to 5.0-5.25%.

"The important bit was that the central bank acknowledged that the substantial cumulative monetary policy tightening and the likely further impact on the economy," said Daniele Antonucci, chief economist and macro strategist at Quintet Private Bank.

"[...] Importantly, the Fed is also signalling that, rather than hiking indefinitely, it plans to hold the policy rate at a sufficiently restrictive level until there's compelling evidence that inflation is on course to return to target.

"However, a more meaningful dovish pivot may not come so soon given the relative resilience of the US job market and as core inflation is not yet falling."