As the November FOMC meeting concludes today, many analysts and news sources are reporting the possibility that the Federal Reserve will announce or at least hint that they may begin to wind down their aggressive stance on interest rate hikes.
If the Fed announces a slowdown in the scope and pace of further rate hikes, this will happen against the backdrop of continued growth in the PCE core inflation index.
The most recent inflation report showed that the core PCE index jumped 5.1% in September compared to the same period last year, the fourth-highest value in this cycle after January, February, and March. The Federal Reserve is still very far from reaching its 2% inflation target. Simply put, inflation shows no signs of slowing down, as measured by their preferred index.
Over the past five FOMC meetings, the Fed has made five consecutive rate hikes, starting with a a% rate hike in March and a a% rate hike in May, followed by three consecutive % rate hikes in June, July, and September. It is assumed that the Fed will raise rates by % for the fourth time in a row after today's FOMC meeting.
The net result of all these hikes is an increase in the base rate from 0 to a% in March to 3–3a% in September.
One possibility as to why the Federal Reserve may reverse the pace of rate hikes is the fact that, based on the current base interest rate of 3% to 3a%, the Fed is losing billions of dollars.
On October 25, Bloomberg News published an article titled "Fed Is Losing Billions, Wiping Out Profits That Funded Spending." In this article, written by Enda Curran, Jana Randow, and Jonnelle Marte, they discuss in detail the implications of the Federal Reserve's hawkish monetary policy, stating: "The bond market is enduring its worst selloff in a generation, triggered by high inflation and the aggressive interest-rate hikes that central banks are implementing. Falling bond prices, in turn, mean paper losses on the massive holdings that the Fed and others accumulated during their rescue efforts in recent years."
The article also says that the recent rate hike is due to central banks paying more interest on the reserves that commercial banks place with them. The result, according to this article, is that higher rates "tipped the Fed into operating losses, creating a hole that may ultimately require the Treasury Department to fill via debt sales. The UK Treasury is already preparing to make up a loss at the Bank of England."
The result of their actions has resulted in huge operating or balance sheet losses that are now materializing. "Fed remittances owed to the US Treasury reached a negative $5.3 billion as of Oct. 19—a sharp contrast with the positive figures seen as recently as the end of August. A negative number amounts to an IOU that would be repaid via any future income."
It seems quite plausible that the Fed is unwilling to take on big losses, which would be an excellent explanation for the reversal of their monetary policy at a time when they are not even close to their 2% inflation target.
