The Fed has maintained its benchmark interest rate of 5.25% to 5.50% for a second consecutive meeting.

The policy statement acknowledges the recent strength in economic activity but emphasizes that this occurred in the third quarter. The quote is retrospective and implies no conviction that the trend will continue. The committee subtly suggests that it will not consider the strong data from the third quarter or the September jobs report, indicating that further rate hikes may not be necessary.

However, the end of the rate hike does not necessarily signal the beginning of a new rate-cutting cycle. Given the hawkish way officials have interpreted positive economic surprises since the September meeting, all of this suggests that the FOMC is inclined to impose an extended pause on rates. Powell stated during the press conference following the decision that the committee was “not convinced” that rates were still sufficiently restrictive and that policymakers remained focused on whether rates were high enough. This cautions against too positive an interpretation of a less hawkish decision than expected.

Financial markets have interpreted the decision and the message positively. Shorter-term Treasury yields, which are more sensitive to the Fed’s monetary policy direction, have slightly decreased, with two-year Treasury yields falling 6 basis points to 4.95% and ten-year Treasury yields down 2 basis points to 4.79%. The yield curve was down 13 to 17 basis points, led by longer maturities.

Market prices for the Fed’s target interest rate trajectory have declined, with federal funds futures contracts still pricing in a probability of around 30% of a rate hike by January and approximately 80 basis points of rate cuts by the end of 2024. As a reminder, the Fed’s projections anticipate a 50 basis point rate cut in 2024.