The Federal Reserve chose not to raise its overnight rate by another .25 today. Most pundits had anticipated a “pause” in the Fed’s effort to put a noose around the economy’s neck.

As bland as the comments following their decision were, Fed Chair Jerome Powell insinuated there would be at least two more hikes in 2023. Thus, the phrase “skip” that’s being bandied about in the news cycle.

The FOMC’s goal is to try to find the so-called “terminal rate” which would signal stable prices amid low enough inflation that the economy can continue to grow while full employment is achieved.

“Economists refer to the terminal rate,” writes Christi Fletcher, a portfolio manager, “as the neutral interest rate where prices are stable and full employment is achieved. In other words, it is a natural interest rate that is neither accommodative nor restrictive, and as such is regarded as an equilibrium rate.”

The terminal rate is also considered to be the peak rate of a hiking cycle. Trouble is, because information and data are imperfect, the Fed often overshoots causing fits and rashes in the broader economy.

“Equilibrium is hard to find,” Ms. Fletcher says, we suspect, with a satisfied stork of the ‘q’ button on her keyboard.

The Fed left rates at 5.0 to 5.25% range today. But the terminal rate is thought by many to be around 5.5 to 5.75%.

Fed Funds Rate 1987-2023

Source: Macrotrends

You’ll note from the chart above, since 1987 each time the Fed fund rate reaches a terminal rate, a recession follows. And rates get smacked down by the Fed quickly. That’s been the Fed modus operandi ever since Alan Greenspan was in town.

The market didn’t know what to make of the “pause” or the “skip”. Jerome Powell did his job. He made statements too boring or obfuscating to lead traders in any one direction. As Charles Kindleberger notes, the Fed must be “an unreliable lender of last resort”. In other words, the FOMC needs to keep everyone guessing.

The Dow ended the day down 231 points. The S&P500 and Nasdaq ended slightly higher than their respective opens.

So it goes,

Addison Wiggin,
The Wiggin Sessions

P.S. Ironically, when I was poking around for a good definition of terminal rate, I stumbled onto one posted to the Silicon Valley Bank website. In fact, the above-mentioned Christi Fletcher is a senior portfolio manager at the bank.

The definition she provided was helpful enough in economic terms. But it was written prior to March 10, 2023 when SVB was ushered into receivership. We suspect “terminal” has a new meaning for managers at the bank now. Equilibrium is, indeed, hard to find.