Fed pause
This week’s June ‘23 FOMC meeting marked a critical point in the Central Bank’s rate hike cycle. Leading up to the meeting, inflation has eased, the stock market continues to rip higher and broader liquidity is growing increasingly constrained as the regional banking system continues to roil from multiple bank failures earlier this year . Days prior, the May ‘23 inflation reading came out at reassuring 4.0%, demonstrating a durable downward trend since the 9.1% peak in June 2022. Core inflation; however, remained stickier at 5.3%, slightly off the April ‘23 reading of 5.5%, but materially down from the peak of 6.6% in Sept ‘22.
With fresh May ‘23 inflation data in hand and known capital markets gyrations stemming from from an insane 500 bps of rate hikes in less than 1.5 years, the Fed decided to take a pause at the current 5.25% level. With the Fed Funds rate now in excess of broad CPI and almost in excess of core inflation, the Fed appears to be making steady progress on its price stability mandate. However, more important than the rate hike decision was the Fed’s commentary on future rate hikes. Two more 0.25% rate hikes are anticipated from the FOMC before year-end.
The combination of pausing in June and forecasting another 0.5% of rates hikes by year-end positions the Fed well. On one hand, they’ve acknowledged inflation is cooling, yet remain cautions on broader financial system effects from its aggressive rate hike path. The forecast commentary really acts as a threat to market participants who think June’s pause is an “all clear” signal for the much anticipated loosening of monetary policy. Powell’s “messaging” at the juncture will one be studied as a chapter in human behavioral psychology. Will the public listen or makes up its own mind on where we’re headed with rate hikes?
The reality is those future hikes will likely not materialize due to the oncoming recession, but the threat remains there for obvious reasons. We’re still a mile off from the Fed’s 2% target inflation mandate. And while it’s seems we’re quickly approaching that level based on recent monthly readings, the last mile, considering “sticky inflation” and upward wage pressure on labor, should be the toughest of the Fed’s marathon. Questions are can we get down to 2% without a recession? And how far will the Fed takes us down this path knowing the odds of a recession by year-end is growing larger by the minute?
