Overview: Over the past week, central bank meetings in the U.S. and Europe resulted in additional huge rate hikes, but also suggested that the pace of aggressive monetary policy tightening to fight inflation finally may slow. This was roughly in line with investor expectations, and mortgage rates ended the week slightly lower.
As expected, the U.S. Federal Reserve raised the federal funds rate by another 75 basis points, to the highest level since January 2008. Investors focused on changes in language in the meeting statement, which suggested that future rate hikes may be smaller than this one. Notably, the statement said that officials will take into account the “lags with which monetary policy affects economic activity and inflation.” The European Central Bank (ECB) also raised benchmark interest rates by the expected 75 basis points to the highest level since 2009 to help bring down inflation. Unlike the U.S. Fed, the ECB has not yet begun to reduce the size of its bond holdings, and some investors thought that the ECB would announce a start date at this meeting. However, officials decided to wait until the next meeting in December to discuss the conditions for shrinking the bond portfolio. The Personal Consumption Expenditures (PCE) Price Index is the inflation indicator favored by the Fed because it adjusts for changes in consumer preferences over time. In September, core PCE was up 5.1% from a year ago, matching expectations. This remains far above the Fed's target level of 2%. A key consideration for investors is how quickly the aggressive monetary policy tightening will bring down inflation.
Gross Domestic Product (GDP) is the broadest measure of U.S. economic activity. During the third quarter, GDP rose at an annualized rate of 2.6%, above the consensus forecast for an increase of 2.3%, and up from a decline of 0.6% during the second quarter. Unexpected strength came from consumer spending and a reduction in the trade deficit, while residential investment (housing) remained a source of weakness.
Core PCE (annual % change)
November 3 — Institute for Supply Management (ISM) Services Index
November 4 — Employment Report