Federal Reserve Chair Jerome Powell is set to discuss the Economic Outlook at New York's Economic Club today, Thursday. This comes just before the Fed's blackout period preceding its rate decision meeting from October 31 to November 1. Despite signs of rapid economic expansion, inflation, and surging bond yields, the Fed is unlikely to halt its 19-month campaign to increase borrowing costs. Philadelphia Fed President Patrick Harker has advised against further borrowing cost hikes to prevent additional economic strain. Powell's upcoming speech is expected to clarify the central bank's rate position.
Investors' concerns include the end of the Fed's rate hikes and Congress's ability to avert a government shutdown. Amidst the Israel-Hamas conflict and an escalating macro environment, global markets remain stable, but US uncertainties could incite more market instability. The largest single-day sell-off of 30-year bonds since the pandemic onset occurred last week due to a hot inflation report, prompting more bets on another Fed rate hike.
On the same day, Vice Chair Philip N. Jefferson will open the 18th Central Bank Conference on the Microstructure of Financial Markets, while Vice Chair for Supervision Michael S. Barr will later address the 2023 Federal Reserve Stress Testing Research Conference on sharp interest rate swings.
Forecasts from CME Group's (NASDAQ:CME) FedWatch suggest that the Fed will hold rates steady in its next policy meeting concluding on November 1, with about a 35% chance of a December rate hike. The odds shift notably into January, with nearly a 50% chance of at least a quarter-point rate hike. This expectation has caused the largest one-week rise in Treasury yields, particularly 10-year note yields, in over eighteen months.
Powell's signaling of a stricter Fed policy could intensify geo-political tensions, particularly the escalating Israel-Hamas conflict that risks involving the broader Middle East in prolonged military unrest. While market predictions suggest the Fed will maintain rates at their next meeting, recent Middle East events and their implications on oil markets might make Powell more cautious. With US headline inflation high at 3.7% and war in the Middle East adding further inflationary risks, bond markets cannot definitively mark an end to the Fed's interest rate cycle. This uncertainty is reinforced by strong September retail sales data and solid industrial production data indicating healthy near-term growth for the domestic economy.
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