As expected, the Fed raised rates to a 22-year high on Wednesday.
Barring a material turn for the worse on the inflation front, July’s 25bps move will be remembered either as the final hike or the penultimate hike of the cycle.
And what a cycle it was. 525bps in the short space of 16 months. With 4.8% core CPI to show for it, versus 6.5% on the eve of liftoff. I’m not sure that’s mission accomplished.
Suffice to say it isn’t clear whether the Fed’s rate hikes actually mattered all that much for inflation. Quite a bit of the moderation on headline, all-items price indexes was attributable to the waning of pandemic distortions, base effects and volatile components the Fed simply doesn’t control. The relative lack of progress vis-à-vis core inflation is telling.
The new statement described the US economy as “expanding at a moderate pace,” which I suppose counts as an upgrade from June’s “modest” clip. You’d have to ask Jerome Powell on that. Job gains have been “robust” and the unemployment rate “has remained low.” Inflation, policymakers reiterated, “remains elevated.”
Aside from the “moderate” tweak, that language was unchanged from the June statement, as was the second paragraph, which again posited “tighter credit conditions for households and businesses” due to March’s turmoil in a banking system which is “sound and resilient” if you don’t count the failures.
“If you are Powell, the number one concern at this stage of the cycle is not allowing FCI to ease,” Nomura’s Darren Shames said Wednesday. “Controlling FCI has to be their primary concern when most financial conditions indexes show current conditions in the same neighborhood as when they began tightening policy.”
That’s a critical point and it really can’t be emphasized enough. The equities rally, bond yields off the highs, credit spreads at YTD tights and so on, all argue for easier financial conditions, at cross purposes with the inflation fight.
The forward guidance was unchanged in the statement. Additional hikes “may” be appropriate, and the Committee will make that determination based on a careful assessment of “the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation and economic and financial developments.”
That presser was a real snoozer, unless something exciting was said while I was dozing off? Next move might be Sept or Oct, might be +25bp or none, FOMC considers policy restrictive now but has not been restrictive enough for long enough, willing to wait until 2025 to get to 2% target, economic activity now increasing “moderately” i.e. accelerating from “modestly”, staff has joined FOMC in seeing no recession this year, bank situation has “settled down”, intra-meeting data was “inline”, acknowledged financial condition loosening per equity market and dollar action but says FOMC focuses on rates.
So . . . FOMC is not troubled by accelerating economy, rising equities, or still very tight labor market, willing to tolerate inflation above target for another two years, and data dependency has fully displaced forward guidance.
Conclusion from this still-sleepy observer: unless core inflation starts actively rising, we can ignore the Fed for now.