February 1st FOMC Follow-Up

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  • The FOMC voted to raise the Federal Funds target rate by 25 basis points to a range of 4.50-4.75%. This was a unanimous decision by the Committee and was consistent with market expectations.
  • This increase of 25 bps is another downshift from the 50 bps increase in December after four consecutive 75 bps increases from June-November that constituted the Fed’s most aggressive hiking cycle since the early 1980’s.
  • The FOMC statement softened commentary about exogenous shocks to inflation (e.g., the pandemic, higher food and energy prices, and price pressure from the Russia/Ukraine war) but continued to signal the Fed plans to raise rates at upcoming meetings as the FOMC seeks to moderate inflation, maintaining language that was first used in March 2022 when the current hiking cycle began.
  • In the absence of revised projections, Chairman Powell’s press conference provided the only future expectations of Fed actions. His comments reflect that shifting to a slower pace allows for the assessment of the progress that has been made in reducing inflation (as recent data reflects). However, substantially more evidence is needed to be confident that it is on a sustained downward path.
  • The plans for reducing the size of the Federal Reserve’s balance sheet that were issued in May 2022 remain unchanged.
  • Equity markets had been flat to down and Treasury yields had declined slightly prior to the Fed’s announcement. Assets rallied following Chairman Powell’s press.
  • The market expects another 25 bps rate hike at the next meeting.

Economic Projections

  • US GDP slowed in Q4 to a 2.9% annual rate, down from 3.2% in Q3.
  • Core PCE, the Fed’s preferred inflation measure, fell to 4.4% in December from 5.2% in September. A trimmed measure of Core PCE calculated by the Dallas Fed (which eliminates outlier components) has converged to the untrimmed metric at 4.4%, suggesting less dispersion within the underlying components of core inflation.
  • The labor market remains tight, with the unemployment rate at a 53 year low of 3.5%. The latest JOLTS report showed 11mm open jobs, implying 1.9 jobs per unemployed worker.

The FOMC is next scheduled to meet March 21-22, 2023


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