• As expected, the FOMC kept the federal funds rate unchanged.
• The statement maintained a bias toward further rate hikes, consistent with the last dot plot.
• The statement noted “tighter financial conditions” and continued strength in the economy.
• PNC expects the FOMC to keep the fed funds rate unchanged into 2024.

The Federal Open Market Committee maintained the federal funds rate in a range between 5.25% and 5.50%, the second consecutive meeting where the committee has kept the funds unchanged. This is the first time the committee has kept the funds rate unchanged at two consecutive meetings since it began to raise the fed funds rate in early 2022. The FOMC has rapidly tightened monetary policy since early 2022, with the funds rate increasing from near zero at the beginning of last year to its current range.

In its statement, the FOMC maintained a bias toward raising the funds rate further. The statement said that “in determining the extent of additional policy firming that may be appropriate to return inflation to 2% over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”

In its discussion of the current economic outlook, the statement noted the strong GDP growth in the third quarter. In addition, the statement said that “job gains have moderated since earlier in the year but remain strong.” The statement noted that “tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation,” referring in particular to the increase in long-term interest rates since the last statement, in mid-September.

The statement said the inflation “remains elevated.” Notably, the statement did not refer to the gradual slowing in inflation that continues to take place.

The statement said that the Fed will continue to reduce its holdings of long-term Treasurys and mortgage-backed securities as scheduled. The statement was approved unanimously.  

Today’s FOMC statement was largely as expected. The FOMC maintained the fed funds rate in a range between 5.25% and 5.50%. But the statement suggested that near-term rate hikes are possible (“additional policy firming”), with no discussion of potential rate cuts. The dot plot from the previous meeting in mid-September indicated that a majority of participants supported one more fed funds rate hike in 2023, which at this point more would have to come at the FOMC’s next meeting on December 13.

With the recent increase in long-term yields, including mortgage rates, the most likely outcome is that the data indicate slower growth and softer inflation between now and the last FOMC meeting of 2023, and the FOMC chooses to keep the fed funds rate unchanged again. But if the data remain strong, particularly on the labor market and inflation, the FOMC is set to raise the fed funds rate another quarter of a percentage point.

Right now the fed funds futures market is pricing in a 20% probability of a 25 basis point increase in the fed funds rate on December 13. There was little market reaction to the statement.