11/30/2022: JPow Signals Smaller Rate Hikes Going Forward

0.5% rate hike expected in December.

The Fed Chair gave a speech at the Brookings Institute today. He said a few important things about the interest rate and economic outlook:

The time for moderating the pace of rate increases may come as soon as the December meeting but the inflation fight is far from over.

My colleagues and I do not want to overtighten because … cutting rates is not something we want to do soon. .. That’s why we’re slowing down, and I’m going to try to find our way to what that right level is.

The labor market shows only tentative signs of rebalancing, and wage growth remains well above levels that would be consistent with 2% inflation. Despite some promising developments, we have a long way to go in restoring price stability.”

In a nutshell, we are likely to see a 0.5% rate hike in December, ending the unprecedented streak of four consecutive 0.75% rate hikes in 2022. But we shouldn’t expect the Fed to lower the interest rate any time soon. The inflation fight is far from over and the Fed is fine tuning the rate and intends to keep the rate steady for a while.

It will be really interesting to see what happens to various asset classes if the 4+% interest rate environment is here to stay. I personally feel good about holding some risk-free assets these days as the 12-month treasury bill is currently paying 4.74%. Sure it doesn’t beat inflation but it’s not clear to me that other asset classes could do better. Frankly, I like this higher interest rate environment better. People can finally make sound decisions based on risks and rewards as the cost of capital is no longer zero. This also encourages more productive and efficient use of capital and bursts speculative bubbles like cryptos, which is basically glorified gambling and should be discouraged .