In line with market expectations, the Federal Open Market Committee (FOMC) voted to maintain the federal funds at the target range of 5.00% – 5.25%. There were no dissents.  

Committee Statement:

• Economic Assessment and Outlook

  • The economic assessment was brief. Growth continues to expand, inflation remains elevated, and the unemployment rate is low.

  • The reference to banks added in March was maintained. It stated that the banking system was “sound and resilient” but that tighter credit conditions would put downward pressure on growth and inflation.

• Current Policy and Forward Guidance

  • The Committee views that holding the target rate steady allows time to assess additional information.

  • Future policy firming remains data dependent and will consider the cumulative tightening in policy and the lags in which policy impacts the economy.

  • However, a tweak in the language from the “extent to which additional policy may be appropriate” to “the extent of additional policy firming that may be appropriate” implies a slightly higher propensity to hike further.

Summary of Economic Projections:

• The dot plot gave us a refreshed indication of the Committee’s expectation for the path of the Fed Funds rate, which showed most participants anticipated 2 additional rate hikes in 2023.

  • The median of the Committee now expects the policy rate to peak at 5.625% in 2023. The most hawkish member expects the terminal rate to peak as high as 6.125%. Only two participants anticipate no further rate hikes.

  • Additionally, the median member expects 225 bps of rate cuts between 2024 and 2025 once Core PCE has fallen below 3% and the unemployment rate is at 4.5%.

  • 7 participants now see the long-run dot above 2.5%, vs only 4 in March.

• Investors also received FOMC participants’ revised outlooks for employment, growth, and inflation:

  • Unemployment estimates were moved lower for 2023 from 4.5% to 4.1% reflecting stronger than expected job growth. The unemployment rate is still forecasted to rise to 4.5% in 2024.

  • Growth was upgraded from 0.4% to 1.0% also reflecting more resilience. Growth in 2024 and 2025 were mostly unchanged at 1.1% and 1.8%, respectively.

  • While headline inflation forecasts were mostly unchanged, core PCE was revised higher to 3.9% in 2023 followed by a decline to 2.6% in 2024 and 2.2% in 2025. The number of participants viewing core inflation risks as weighted to the upside rose from 11 to 12.     

Chair’s Press Conference:

While the Statement and SEPs were hawkish, Chair Powell struck a more balanced tone:

• As per the dots, Chair Powell stated that “nearly all participants think further rate changes will be necessary.” However, he also defended the June decision to hold and explained that July remains a “live meeting” (i.e., nothing is decided yet).
• According to Powell, the rationale to skip was driven by a desire to slow the speed of tightening: “As we started our rate hikes early last year, we said there were three issues that would need to be addressed in sequence — the speed of tightening, the level rates would need to go, and the period of time. It made sense to moderate our rate hikes as we got closer to our destination. The decision to consider not hiking at every meeting and to hold rates steady at this meeting is a continuation of that process… It may make sense for rates to move higher, but at a more moderate pace.”
• Another reason to pause is the lagged effect of monetary policy and the unknown impact from the banking crisis: “The reason we're comfortable pausing is much of the tightening took place last summer and I think it's reasonable to think that some of that may come into effect…It gives us more information to make decisions…It allows the economy a little more time to adapt as we make our decisions going forward. And we don't know the full extent of  the consequences of the banking turmoil that we've seen. It would be early to see those…so we're stretching out into a more moderate pace as appropriate to allow us to make that judgment of sufficiency with more data over time.”
• In determining whether to hike in July, the Fed will look at the previous quarter’s data and upcoming prints, as well as “what's happening in the financial sector and the evolving outlook.”
• Chair Powell suggested inflation remains well above their goal and will take time to revert lower, but “the conditions that we need to see in place to get inflation down are coming into place…That would be growth meaningfully below trend. It would be a labor market that's loosening…that kind of thing.”

Our View:

• The risks to monetary policy are now more balanced as the cumulative and lagged impacts slow the real economy, put downward pressure on inflation, and tighten credit conditions.
• As we arrive at the end of the hiking cycle, the government bond market should continue to see demand from investors looking to lock in relatively high risk-free rates. The impact of restrictive monetary policy will continue to slow activity and push prices lower, eventually leading to the consideration of rate cuts later in the year. As a result, we expect the 10-year yield to move towards a 3.00% – 3.50% trading range by year end.

09vt231406165322