Federal Open Market Committee, 1/11/2023

Federal Open Market Committee meeting, US Fed. 31^st October/1^st November 2023

Fed Funds Rate unchanged again

The Federal Open Market Committee voted keep the Fed Funds Rate at 5.25% - 5.5% during its meeting on 31^st October and 1^st November. The run-off of assets purchased between 2020 and 2022 in response to the coronavirus pandemic will continue at an overall rate of $95b. per month. The press release following the FOMC meeting was relatively upbeat by recent standards. Inflation is falling and the recent rate hikes have not thus far caused a major slowing of the economy. In the ensuing press conference, Fed Chairman Jay Powell stressed that there was still “a long way to go” to bring inflation back down to the Fed’s 2% target and refused to rule out the possibility of further rate increases. The indicators to which the FOMC pays the most attention, in particular the labour market, do not suggest that monetary easing will be on the agenda for some time. Unemployment levels remain at historically low levels even though October’s reading of 3.9% was the highest since January 2022. At the same time, the rate of annual wage growth, while declining from the high of 7.1% in June, still remains higher than the inflation rate. (September’s figure was 5.3%). The US economy expanded by 4.9% in the third quarter of 2023, the strongest quarterly performance since Q4 2021. 

While it may appear that the predictions of a recession in the USA in these notes are proving unfounded, a closer examination of the US economy revels some major concerns. Yields on 10-year US Treasuries rose above 4.5% in October, the first occasion since 2008 that this figure has been so high. With the Fed still leaning in a hawkish direction, bond yields are likely to remain at elevated levels suggesting that the current huge US budget deficit, which amounted to 9% of GDP in July 2023, is sustainable. 

Furthermore, the uptick in US M3, which began in May, could well have run its course. The recent growth in broad money has been driven not by new bank lending but by rapid growth in Money Market Mutual Funds, which have been buying large quantities of US government debt. There are indications that this growth slowed in October and this will therefore slow broad money growth down as it will have to rely on the deposits created by new bank credit. Latest figures from the Fed suggest that growth in new bank lending remains very weak. “Loans and leases in bank credit” – which equates to new bank lending – grew by only 2.5% in the year to September, a considerable decline on the double-digit growth of 2022. Indeed, growth in new lending to businesses has been consistently in negative territory since the second quarter of the year.  

In summary, while the US economy has proved more robust than anticipated in 2023, the contractionary policy pursued by the Fed has resulted in US M3 declining by over $52b. from its peak in August 2022 in spite of the growth in MMMFs. A recession therefore remains highly likely in 2024.