Powell Signals December Rate Hike Unlikely

By Ye Xie, Bloomberg Markets Liver reporter and strategist

Fed Chair Jerome Powell’s speech Thursday suggests the central bank has a “bias” to “look through any hawkish data and delay any potential further rate hikes until 2024,” said Tim Duy, chief US economist at SGH Macro Advisors.

The risk is that a dovish Fed pushes up inflation expectations, “forcing its hand on another hike,” Duy, a long-term Fed watcher, wrote in a note.

Powell pointed out that the Fed is making progress toward its dual mandate on inflation and employment, even though the central bank hasn’t raised rates since July. It suggests that Powell doesn’t want to hike again unless that progress is stalled, the economist said.

With market expectations on November hike already low, “Powell’s discussion was overkill in terms of setting expectations for the November meeting.” said Duy. “The open question is about the December meeting, and the message is that the Fed doesn’t anticipate raising rates in December, although of course Powell is not going to say that directly.”

Duy notes that rising inflation expectations in early March prompted Powell to put a 50bp rate hike on the table at the time. So if breakeven rates head toward the March level, “the Fed will rethink the policy path."

Five-year breakeven rate, a gauge of investors’ inflation expectations derived from the difference between the nominal Treasury and TIPS yields, rose to a seven-month high of 2.46% Friday. In March, the gauge jumped to about 2.8%

OIS rates tied to the December Fed meeting suggests traders see slightly higher than 1/4 of a chance for a rate increase by year-end.