Pro Perspectives 11/2/22

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November 2, 2022
In the September Fed meeting, the expectations were set for another 125-150 basis points of rate hikes by year end. 
The Fed followed that meeting with a very active media campaign, where they told us, on a daily basis, that they would do whatever it takes to slay inflation.
So, coming into today's Fed decision, the expectations were set for another 75 basis point hike.  The Fed delivered on that. 
And coming into today's Fed decision, the interest rate market was pricing in about a coin flip chance of another 75 basis point chance in December
By the end of today, markets are pricing in a better chance at 50 bps for December.  That's somewhat less severe.
If we were looking for positives from the Fed commentary today: 
1) The Fed statement acknowledged the, yet to be felt, cumulative effect of 375 basis points of tightening on economic activity and prices (i.e. the rate hikes have a lagging effect).
2) They acknowledged that financial conditions are tighter, due to their policy actions.
3) Powell acknowledged that inflation expectations are still well anchored.  Of course, this is what the Fed cares most about, as losing control of inflation expectations can quickly result in consumers pulling purchases forward, with the idea that prices will be higher tomorrow.  And thus, a price spiral. But inflation expectations have been tame, mostly attributed to the Fed's threats to economic activity and to financial market health.
So, these three points are all quite positive, especially given that the monthly inflation readings over the past three months have come in tame. 
There is a clear case for "mission accomplished."  Sit and watch.  
Still, the Fed continues to err on the side of overtightening, and they want us to know it.   
On the negative side for stocks and the economy today, Powell intentionally wanted to hammer home four points:
1) They have more "ground to cover" on rates. 
2) They think they will get to a higher level on the Fed Funds rate now, than they forecast just two months ago. 
3) Powell made an effort to include in his "off-script" Q&A session that he thinks "it's very premature to think about pausing (on rate hikes)."  Emphasis, very.
4) And, he says they are committed to bringing inflation down (erring on the side of overtightening).
Now, with all of the above in mind, remember the Fed, largely, set these expectations back in September.
And as we've discussed, more important, at this stage, is what happens next Tuesday. 
The betting markets continue to price in a better than 70% chance of a Republican sweep of Congress.
In that scenario, the spigot on any additional fiscal spending would be closed. Moreover, the inflationary policies that have already been approved (including Build Back Better/IRA) would be challenged. If that plays out, the Fed would find themselves in a position where they have overtightened, already.