Federal Open Market Committee Statement: July 2023
Market Views from the Global Fixed Income, Currency & Commodities (GFICC) group
U.S. Rates Team
In line with market expectations, the Federal Open Market Committee (FOMC) voted to raise the federal funds rate by 25 basis points to a target range of 5.25% – 5.50%. There were no dissents.
- Economic Assessment and Outlook
The economic assessment was brief. Growth continues to expand and was upgraded slightly from modestly to moderately; 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 likely put downward pressure on growth and inflation.
- Current Policy and Forward Guidance
Future policy firming remains data dependent and will consider the cumulative tightening in policy and the lags in which policy impacts the economy.
Chair’s Press Conference:
The key takeaway from Chair Powell’s press conference was his emphasis on data dependency:
- On future rate hikes, every meeting remains live, but data dependent: “We haven't made a decision to go to every other meeting. We're going to be going meeting by meeting…I would say it is certainly possible that we would raise funds again at the September meeting if the data warranted. And I would also say it's possible that we would choose to hold steady at that meeting…I think it's not an environment where we want to provide a lot of forward guidance. There's a lot of uncertainty out there. We just want to keep moving at what we think is the right pace.”
- The criteria for future hikes is holistic: “We're looking for supply and demand through the economy coming into better balance, including in particular the labor market. We'll be looking at inflation, asking ourselves [if we assess] this whole collection of data…as suggesting that we need to raise rates further. If we make that conclusion, then we will go ahead and raise rates…the idea that we would keep hiking until inflation gets to two percent [is] not the appropriate way to think about.”
- Policy is restrictive, but not for long enough and has some ways to go: “We see the pieces of the puzzle coming together…The real federal funds rate is now in a meaningfully positive territory. Take the fed funds rate and subtract [inflation] expectations and you get a real rate above most estimates of the longer-term neutral rate. So I would say monetary policy is restrictive…But I would say what our eyes are telling us is policy has not been restrictive enough for long enough to have its full desired effects. So we intend to keep policy restrictive until we're confident that inflation is coming down sustainably to our two percent target. And we're prepared to further tighten if that is appropriate. We think the process still probably has a long way to go.”
- Monetary policy transmission remains uncertain: “We know that financial conditions affect economic activity and inflation with a lag that can be long and variable…[but there is] a lot of uncertainty around the length… We know that in the modern era financial conditions move in anticipation of our decisions and that has clearly been the case in this cycle. In a sense the clock starts earlier than it used to. But that doesn't necessarily change the process from that point on and it's not clear that it has.”
- On bank lending and the SLOOS report, it was broadly in-line with expectation of further deterioration in credit conditions: “You've got lending conditions tight and getting tighter, weak demand, and it gives a picture of pretty tight credit conditions in the economy.”
- 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.