ACTV - Is The Fed Done Hiking Rates? It's Complicated
2023-11-03 15:30:00 ET
Summary
- Is the Fed done hiking?
- What bond yields say about interest rates and the economy.
- What a robust US economy could mean for rates.
The U.S. Fed kept interest rates steady for a second straight meeting, fueling speculation the central bank is done tightening. Chris Whelan, Senior Canada Rates Strategist and Head of Portfolio and ESG Strategy at TD Securities, discusses the Fed’s potential next move with MoneyTalk’s Greg Bonnell.
Transcript
Greg Bonnell: The US Federal Reserve held its trendsetting rate for the second meeting in a row. The market's trying to sort out whether this means we're actually at the end of the rate hiking cycle. Joining us now to discuss, Chris Whelan, Senior Canada Rate Strategist and Head of Portfolio and ESG Strategy at TD Securities.
Chris, great to have you back on the program.
Chris Whelan: Thanks for having me.
Greg Bonnell: All right. So we're seeing a bit of a rally in the markets right now. We're seeing a reaction that seems to suggest that some market participants think we're at the end. What did you take away from the Fed holding for a second consecutive meeting, and are we done?
Chris Whelan: Are we done? I think every time that they come out and say that they didn't hike, it gives us more confidence that we're done. I think that we are too early in North America in general to feel fully confident that we're done the hiking cycle. We'll have to see how inflation behaves in the new year. We'll have to see how growth holds up, or doesn't hold up, in the new year.
For us, our bias is that they are done but risks still remain. But we do see a notable slowing in the economy next year.
Greg Bonnell: Notable slowing in the economy. Obviously, that's what the Fed would need to see. So let's start digging into that. It's been the persistently strong, I guess, performance of labor or the economy in the States that's left a lot of us guessing. What makes you think that's going to start to turn?
Chris Whelan: What makes us think that that's likely to turn is really that tightening cycles do work and that they have a lagged effect that comes into the economy and that eventually higher interest rates slow spending and slow investment and then that trickles back into the economy. So it's a fairly classic analysis of tightening rates and leading to meaningful slowdowns.
However, are we thinking that we're going to have a major recession next year? No. We think it's going to be a fairly shallow recession in the US. And we could potentially even avoid it in Canada, although we're teetering the line quite closely right now.
Greg Bonnell: What did you make of Jerome Powell's tone yesterday? I mean, our central banks have seen lately to have been in a mode where they don't want to blink. When they're asked question after question about, are you done, are you going to start cutting at some point, is all this working? They seem to want to hold a pretty firm line. Did we get more of that from Powell yesterday?
Chris Whelan: I think we got a fairly neutral tone from Powell and co yesterday. In the end of the day, the one point that stood out was they mentioned financial conditions. The market read that as a more dovish signal for rates, that we were closer to being done than not. I think that's all we really got out of that.
In the end of the day, if someone like Jerome Powell comes out and starts talking about cutting before we can truly declare victory on inflation, that can drive consumer behavior. All of a sudden, that's picked up as cuts are coming, and then you can almost change the behavior of the economy, just from a speaker as powerful as him.
So I think in the end of the day, they did the right thing. They toed a fairly neutral line, emphasized a couple of things, such as financial conditions, and I think it wasn't an overly notable meeting. And I think because it wasn't an overly notable meeting, that actually allowed the bond market to rally. So we saw yields move lower. The Treasury market in the US actually announced less issuance in the long end, less pressure in the long end. That's less risk hitting the market. That allows yields to come in. So I think that, combined with the Fed yesterday, allowed the yields to move lower.
Equities, you kind of already mentioned this before, equities have been signaling that something's going on, that they haven't been very happy lately. They're having a good day today, but they haven't been very happy lately. I think the bond market has actually kind of had the ability to catch up to that with the Fed and the Treasury announcement program, because there's been a lot of concern on how much issuance is weighing on the market and how high that's pressuring yields.
I think we got a little bit of relief yesterday. Plus, the Fed signaling hikes are getting more likely done than not, still some risks. And put it all together, yields are 15, almost 20 bps lower in the last 48, 72 hours. It makes sense. I can't argue with it.
Greg Bonnell: How quickly could that turn around? I mean, we were only two weeks ago watching the US 10-year Treasury yield and getting closer to 5, got above 5, flirted with it a little bit. You got a dramatic pullback now. Could it re-accelerate? I mean, things just seem so volatile.
Chris Whelan: Things are extremely volatile. For a while there, we were going from good print to bad print, good print to bad print. We didn't know what to think. Inflation is-- there's a bit of exhaustion in when is inflation going to come down. So putting that all together, and like I said a couple of minutes ago, we still need more data to confirm that it's over.
So we can absolutely reignite. If all of a sudden, Christmas spending, year-end spending is extremely strong, surprises everything, we go into January, new price hikes come through, consumers are accepting them, then we could absolutely go higher again. That's not our base case, but it would be - there's no way I would be saying that we can't go through 5%.
Greg Bonnell: Do we have to think of then ongoing central bank meetings as being live, in the sense that if the Fed decided whatever's happening in the economy, maybe we need another hike, they wouldn't warm us up to the idea, like they could just go into every meeting just thinking it could happen?
Chris Whelan: They don't necessarily have to warm us up, but I think the market would feel warmed up because we would see it in inflation, in the inflation data ticking back up and the consumer data, basically all the economic indicators. It's going to be data-driven.
Greg Bonnell: And we wouldn't be surprised. We would be seeing the same thing that they're seeing, right?
Chris Whelan: I think if they're going to hike again, I think the market's going to have understood that they're going to hike again because we're going to have seen a pretty convincing story in the data.
Greg Bonnell: What would you think-- apart from, obviously, jobs, which we'll be getting very soon, a fresh read on that, inflation, these are the key reports-- what else should we be taking a look at to get an idea of as to how comfortable the Fed might be where they are?
Chris Whelan: I think retail sales. Retail sales is something good to look at. Generally, in your classification of leading economic indicators, at the end of the day, the thought train is we hike, growth slows, and then inflation slows. So right now in the US, their growth is holding a lot more resiliently than Canada's is at the moment. So what we're really looking for is any key metrics around growth.
So I think it's anything that relates to the growth story. The labor market can be lagging. Inflation can lag the slowing in growth. So I think it's really anything around economic growth. GDP is a big deal, and anything that drives the GDP story. There's the Nowcast for the GDP forecasts that are put out by Atlanta Fed, for example. Those are things that I would be honing in on to get a feel for what's in the air.
And then, at the end of the day, the market's fairly efficient. You're going to see rate hikes being priced in right off the data, and then the market will tell you right away what data is going to matter. But I think it's going to be very growth-sensitive in terms of pricing further hikes in.
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Is The Fed Done Hiking Rates? It's Complicated