The Federal Open Market Committee met this week and raised the Fed funds rate by 0.25%. Here is a summary of their statement and some interpretation of what the Fed statement means.
Randolf Westlund's (Chief Investment Officer, CRBT) summary of the Fed's commentary and rate increase:
Not much change from previous meeting. Fed funds rate increased to 5.25%-5.50%. Repeated items of note: 1 – job gains robust; 2 – unemployment rate remains low; 3 – inflation remains elevated; 4 – banking system sound and resilient; 5 – tighter credit conditions’ likely effects uncertain. Statement also notes economic activity has improved from modest to moderate. Unanimous vote. Balance sheet reduction plan continues.
There is no new Summary of Economic Projections (SEP) with this meeting. Even so the Fed seeks to “keep the main thing the main thing” and that main thing is to quell inflation. Thus, the core message remains inflation is too high and the lean still looks to be toward rate increase(s). Prior to the Fed meeting, markets had coalesced around a .25% rate increase, and market rates have been fitfully sliding back up toward the levels reached just ahead of the regional bank debacle in mid-March. Futures now indicate no cuts until Spring 2024, more or less in keeping with the interpretation of the last SEP and dot-plot (higher highs followed by higher lows?).
The Press Conference did not really uncover any new information, as repeated tries to ask the same questions in different words (how much more, in what manner, and when will you stop) elicited the same answer – depends on the totality of the data, we will be watching, one meeting at a time. Mr. Powell indicated that the fed funds rate is seen as restrictive. While policy has not been restrictive enough for long enough to ensure the desired inflation progress, it is good to see progress. While the Fed staff projections have a noticeable slowing but no longer a recession, Mr. Powell is not ready to use the word optimism, but said that there is a path to getting inflation back to 2 percent without a sharp downturn and large losses of employment, and that the Committee is completely unified behind that inflation focus, which will benefit workers and families, today and also in the future. He repeatedly reminded all that more jobs and income and economic growth is good news. When asked if better economic news posed a problem, he repeated his core message: depends on the totality of the data, we will be watching, one meeting at a time, until we see inflation on a sustained slower path.
As the economy continues to perform better than expected, the “recession is inevitable” voices remain. Happily, consumer surveys have recently shown sudden upward shifts that belie the “going to get worse” narrative, as activity continues to confirm that better sentiment. Further, economist surveys have marginally lowered the recession probability and slightly increased the trudging pace in forecasts. As always, when you hear the phrase slow growth, do you focus on slow, or on growth? I continue to believe that the core economic fundamentals are better founded than portrayed/feared by many as we continue to recover from the incredible experience of pandemic shutdowns and re-openings. Meanwhile, volatile equity markets led by technology-oriented companies have continued the upward tilt in recent weeks. All investors and observers will be attuned to upcoming second-quarter corporate earnings reports and expectations for the second half. Could companies perform better than expected even as the economy trudges along? Yes. The multi-year duress for many companies has prompted an intense focus that has prepared businesses for the benefits of ongoing economic expansion. Comparatively, fixed income investors may be locked into these levels of rates for some time, receiving more current portfolio income and a chance to extend maturity to lock in a better run rate than has been available in years. That higher income will help offset some of the price decline that could come if rates rise further.
In sum, data-dependency is uncomfortable, but as the data unfolds, we may all find that the ongoing trudging pace is just what we need to keep moving ahead.
This commentary was prepared by Cedar Rapids Bank & Trust and is intended for your private use. This material reflects the current opinion of the Investment Group based upon sources believes reliable but not guaranteed by it. Opinions expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
Federal Reserve Statement:
Recent indicators suggest that economic activity has been expanding at a moderate pace. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated. (For reference, year-over-year inflation in June was 3.0%, down sharply from a peak of 9.1% in June 2022. Yet a “core” inflation measure that is preferred by the Fed, which excludes volatile food and energy costs, was still up 4.6% in May from a year earlier.)
The U.S. banking system is sound and resilient. Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 5-1/4 to 5-1/2 percent. The Committee will continue to assess additional information and its implications for monetary policy. In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective.
In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.