The Fed’s well publicized “leak” hinting that the Central Bank would raise the Fed Funds rate by 75 basis points this week, but that another hike of equal magnitude in December meeting was not a certainty proved at least partially correct.  The committee did raise rates by 75 basis points and, with it, offered a new sentence to the statement: “In determining the pace of future increases in the target range, the committee will take into account the cumulative tightening of monetary policy…”  It was a written acknowledgment that the committee realizes that they have already tightening aggressively and, importantly, policy change works with a lag.  However, Chairman Powell’s tone 30 minutes later, at the post-meeting press conference, was decidedly hawkish.  We weren’t the only managers to be fooled by the head fake.  Bond traders immediately took rates higher.  May 2023 Fed Fund futures had rallied to 4.805% on the day of the “leak,” but have since reversed and are closing out the week at 5.12%.  Similarly, the 2-year note which traded down to recent low of 4.30% reversed violently and are closing out the week at roughly 4.71%, the high for the year.

He must have been handed an advance copy of this morning’s employment report as he was headed down the hall to the conference, because it showed no sign of a moderating economy.  The report showed that 233,000 jobs were added to the economy, outpacing the 200,000 that was expected.  Average hourly earnings also rose last month, which is certainly a worry for the Fed.  Especially since the mostly overlooked JOLTS survey of unfilled job openings unexpectedly jumped by 1 million, rising to 10.7 million unfilled jobs.  Granted, rising interest rates are crushing the auto and home sectors, but the robust demand for workers and the rise in wages seems to be more than offsetting the effect.

With the calendar ticking down, the FOMC will have the luxury of two more inflation reports before their next policy meeting on December 14th.  We’ve never been fans of policy moves in December, but if CPI doesn’t down tick before the December meeting, the Fed is likely to follow on with another 75-basis point hike.