The Fedspeak over the past two weeks and the minutes of the FOMC’s November meeting provide investors with a gap in the curtain to gauge the new phase of risk management in which the Fed’s pace of tightening and the terminal rate are becoming more data-dependent. According to the minutes, participants of the FOMC’s November remarked that:
purposefully moving to a more restrictive policy stance was consistent with risk-management considerations…There was wide agreement that heightened uncertainty regarding the outlooks for both inflation and real activity underscored the importance of taking into account the cumulative tightening of monetary policy, the lags with which monetary policy affected economic activity and inflation, and economic and financial developments.
Minutes of the FOMC Nov. 1-2, 2022, p.10
Inflation, especially services inflation, is still sticky but after raising its policy overnight Fed Fund rate target from 0.00-0.25% range to 3.75-4.00% in eight months, the Fed is finally signaling its intention to reduce the size of future rate hikes starting probably from December and adopting a data-dependent risk management approach going forward. It is important to reiterate here that the change in the Fed’s thinking and approach does not mean that the Fed is pivoting in the sense of having decided to end the current tightening cycle. The Fed needs time to allow the impact of the rate hikes over the past eight months to come about as monetary policy working with lags. In addition, the Fed needs time to assess the impact of the quantitative tightening as it winds down its balance sheet.