June 27th FOMC Follow-Up

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Rates

  • The FOMC voted yesterday to increase the federal funds target rate by 75 basis points to a range of 2.25 – 2.50%. This decision was unanimous despite some prior reporting in the press that Kansas City Fed President Esther George might dissent from the decision as she had at the June meeting.
  • The decision for a 75 basis point hike comes on the heels of a volatile period in which June CPI unexpectedly peaked to 9.1%. This led market participants to price in a high probability of a 100 basis point hike before Fed officials talked markets back down to 75 basis points just ahead of the required “quiet period” before yesterday’s meeting.
  • Chairman Powell indicated the Committee views the new federal funds target range as having reached a neutral level but anticipated the need to continue with additional hiking until rates reach at least a “moderately restrictive” level.

Fed Balance Sheet

  • Yesterday’s FOMC decision continues the Fed’s balance sheet runoff plan that was first communicated in May. For July and August, the Fed is allowing maturing Treasury assets in excess of a $30 billion monthly cap, and agency debt and mortgage-backed securities in excess of a $17.5 billion cap, to roll off the balance sheet.
  • In line with this plan, beginning in September, the Fed will double the amount of assets that are allowed to roll off the balance sheet on a monthly basis.

Economic Conditions

  • Since the Fed published its Summary of Economic Projections in June, inflation has come in higher and economic activity has come in weaker than expected.
  • The Committee led yesterday’s statement by highlighting that “Recent indicators of spending and production have softened,” while also noting that “job gains have been robust in recent months, and the unemployment rate has remained low.”
  • Powell stated in the press conference that some softening in labor markets is probably necessary to get inflation back down and indicated he doesn’t believe the US economy is currently in recession.

The FOMC is next scheduled to meet Sept 20-21, 2022

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