July 26th FOMC Follow-Up

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  • The FOMC voted to increase the Federal Funds target rate by 0.25% to a range of 5.25 – 5.50%. This was a unanimous decision by the Committee and was consistent with market expectations heading into the meeting.
  • The policy statement was largely unchanged at this meeting, offering investors little forward guidance. It states that “The Committee will continue to assess additional information and its implications for monetary policy.”
  • In his press conference, Fed Chair Powell expressed uncertainty on future decisions saying that the FOMC “will go meeting by meeting” with respect to policy. The higher-for-longer verbiage was reiterated as he said, “we intend to keep policy restrictive until we’re confident inflation is coming down sustainably to our 2% target” and did not believe that would happen until around 2025.
  • Curbing inflation remains the top priority for the FOMC. Powell said, “The worst outcome for everyone…would be to not deal with inflation now…Whatever the short-term social costs of getting inflation under control, the longer-term social costs of failing to do so are greater.”
  • Equities had been flat to down prior to the policy announcement. The 25 bps rate hike led to a modest rally that was then reversed as Powell emphasized that cuts this year were unlikely, leaving stocks largely unchanged for the day. The -0.02% return for the S&P 500 was the smallest FOMC meeting day move for the index since July 2014. Treasury rates were roughly flat on the day as well.

Economic Conditions

  • The annual CPI rose by 3.0% in June, the lowest increase since March 2021. Core CPI, which excludes the more volatile food and energy prices, increased 4.8%. The Fed’s preferred inflation measure, Core PCE, has remained between 4.6 – 4.7% for most of 2023 (the June figure is due on July 28th), more than double the Fed’s 2% target.
  • A soft landing, where inflation moderates to the target without a recession and high unemployment, is still Powell’s base-case view. The Federal Reserve staff, which operates independent of FOMC members, has forecast a slowdown in GDP but not a recession.
  • The supply and demand imbalance in the labor market has moderated but persists. Unemployment remains near long-term lows at 3.6%. Job gains averaged 244k per month over the last three months, slower than earlier this year but still a strong pace. On the other hand, nominal wage growth has showed signs of easing and job vacancies have declined this year.

The FOMC is next scheduled to meet September 19 – 20, 2023.


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