Fed leaves US rates unchanged, interpreted as a dovish pause.

As expected, the Fed left rates unchanged. But their acknowledgement that tighter financial conditions are starting to drag on growth came as a surprise.

2 November 2023

A unanimous vote by Federal Reserve (Fed) committee members to leave rates unchanged was as much anticipated by the markets. What probably wasn’t as anticipated was their acknowledgment that financial conditions are beginning to weigh on economic activity given the relatively strong readings we have seen so far this year. This isn’t something that they have previously referenced and it could be inferred that they believe rates have probably already peaked, although obviously they won’t commit to that. Acknowledging this explicitly after their hiking campaign is so obviously tautological that it might beggar belief, but that is where we are.

Now the Fed has to maintain market expectations of their inflation-busting campaign by having the option to raise further whilst not wanting financial conditions to materially get tighter from here by raising further. This will be a precarious walk for them. The market reaction to this dovish pause has seen a fairly large seismic shift in Treasury yields, falling 18 bps across the curve and equity markets up 1% - a belated Halloween treat as we motor into the end-of-year rally perhaps.