As expected, the Fed raised rates at its May meeting by 25bps in what could be the final hike of the most aggressive tightening cycle in a generation.
Wednesday’s move, the 10th consecutive, brought rates to levels which may constitute “sufficiently restrictive” territory, an elusive realm that can only be identified in hindsight (if ever), once inflation begins to recede in earnest.
In the new statement, the Committee tipped its intention to pause. The Fed will “closely monitor incoming information… in determining the extent to which additional policy firming may be appropriate,” officials said.
So, they’re retaining optionality, and in the current environment, that means reserving the right to keep hiking if necessary. But their inclination is to stop and assess.
Following Wednesday’s hike, rates are consistent with the 2023 dot, and also with the market’s expectations for terminal.
Given that, you could argue the Fed has reached a “good” stopping point, assuming you’re inclined to accept the notion that an inflation-targeting monetary authority is justified in ending a rate-hiking campaign with price growth still running double the target.
Other changes to the statement were cosmetic. Economic activity is still expanding at a “modest” pace, job gains are “robust,” the unemployment rate is “low” and inflation is “elevated.”
“Elevated” indeed. Note that core PCE is still 2.6pp too high.
The Fed explicitly acknowledged that tighter credit conditions “are likely” to curb economic activity, hiring and inflation, although the “extent” of any such moderation “remains uncertain.”
As ever, the statement was keen to reiterate that the Committee is “highly attentive to inflation risks.” So much so, apparently, that they’re going to stop hiking rates before there’s any observable progress on measures of price growth in core services excluding housing, the collection of categories which matters most, according to Jerome Powell.
Sorry, I couldn’t resist the cheap shot.
A pause is not the end. If inflation reaccelerates — as it seems to want to — the FOMC will be back on the rate-hike train — maybe even as soon as the next meeting (depending on data, of course). Disclaimer: I’m a hawk when it comes to inflation (but our esteemed already knew that).
It would have been cooler if Powell had landed a jet on a carrier with a “Mission Accomplished” banner flying. Just saying….
LOL.
the makings of a memegolf clap
In prior rate hike episodes going back to the 1990s, hikes were stopped with FF 200bp or so above core sticky inflation.
Of course, in those periods, there was little inflation (core sticky CPI about 3% in mid ’90s, 2% in mid-00s, 1% in Powell’s last rate normalization attempt in 2018).
Today, there is lots of inflation, so we are going to pause hikes at FF barely above core sticky CPI.
Wait, that doesn’t sound right.
Perhaps the Fed expects substantial credit contraction (more than just 25-50 bp FF equivalent). Or the Fed is quite worried about financial system stability (and how closely it has supervised banks, ref the Barr report). Or the Fed expects a material recession (although Powell says he personally doesn’t, and I think he’s actually a straight shooter). Or the Fed thinks even a mild recession will snuff out inflation (that stagflation isn’t possible).