Federal Reserve:Meetings/2023 July 26

See also: Federal Reserve

Results

• Fed hikes interest rate by 25 basis points, taking the target range to 5.25%-5.5%.
• The rate hike was largely anticipated by the market.
• The decision was unanimous.
• The post-meeting statement said inflation remains elevated and that job gains have been robust.
• The statement upgraded the pace of economic activity to “moderate” from “modest” at the June meeting. “In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals,” the statement said.

Magaly's Assessment

Powell is still being consistent with his determination to fight inflation, even with the better than expected June CPI reading. He argues this is only a 1-month data, and we need to see consistent data in this direction to be sure inflation is on its path to 2%, that core inflation is still high, and labor market still not softening enough. So base on this he guides that another rate hike is still possible if the data warrant it, but the decision will be made meeting by meeting, and he also reiterated that rate cuts will not be done until there is certainty inflation is on a clear path to 2%.

After the press conference, the market still does not think another hike could be done (probabilities for September and November remained basically the same), but until now the market is the one that had to adjust its expectations every time they wanted to "fight" the FED due to the FED determination, and no the other way around. I think is still uncertain if this time they will be correct in "doubting" it.

In my opinion, another hike was not needed, and even less needed is another one later on this year since I think we still have not even felt the full effect of the rate hikes done until now due to the long lags that monetary policy transmission has. The risks going forward could be an overtighten which could lead to a more prominent economic contraction later on this year or next year. In my opinion, the Fed made a mistake in 2021 by reacting late to the inflation increase, and they could be making the same mistake this time in the other direction. But Powell has been clear several times that the short-term consequences in the economy from overtightening are less important than the long-term consequences of persistent inflation, so based on this we can probably assume they are willing to take the risk of overdoing it.

Conferences Notes

Future Rate Decisions

• Haven’t made any decisions about any future meetings including the pace at which they would consider hiking, It is certainly possible to raise funds again at the September meeting if the data warranted and it’s possible to choose to hold steady at that meeting.  
• June data broadly consistent with expectations, meaning the path of 2 rate hikes was/is still possible, because that's what they projected.
• Rate cuts wont happen this year, and next year rate cuts will be dependent about the confidence that inflation is, in fact coming down to 2 percent goal.
• There is a possibility of cutting rates at some point but continuting with QT as part of balance sheet normalization, but will be depending on where we are in the cycle

Inflation

• The June CPI report was welcome but it’s only one report, one month’s data, and cant make future decision only based on it, need consistent data in that direction.
• Core inflation is actually a better signal of where headline inflation is going, because headline inflation is affected greatly by volatile energy and food prices. Core still remains high.
• Powell dont see getting to 2 percent inflation all the way back to 2 until 2025 or so.
• The worst outcome for everyone, of course, would be not to deal with inflation now, not get it done. Whatever the short-term social costs of getting inflation under control, the longer-term social costs of failing to do so are greater.

Economic Growth

• At the margins, stronger growth going forward could lead over time to higher inflation. And that would require an appropriate response for monetary policy.
• Seeing a strong economy still that created confidence that they can go ahead and raise interest rates now for the third time since the March events
• The staff now has a noticeable slowdown in growth starting later this year in the forecast. But given the resilience of the economy recently, they are no longer forecasting a recession.
• SLOOS will come out early next week, and it’s broadly consistent with what you would expect, you’ve got lending conditions tight and getting a little tighter. You’ve got weak demand too.
• There is lot of uncertainty around the length of the lags, but that’s just one component of the broader uncertainty that we face.

Labor Market

• Very likely to have some softening of labor-market conditions, consistent with having a soft landing. But you would have some softening in labor-market conditions that’s still likely as we go forward with this process.
• By so many indicators, labor market demand is cooling, but still not consistent with 2% inflation. But t’s gradually slowing and that’s a good prescription for getting where we want to get.
• Wages are probably an important issue, going forward. Labor market conditions broadly are going to be an important part of getting inflation back down and that’s why we think we need some further softening in labor market conditions.

Market Expectations

Markets are expecting a rate hike in July with a 98.9% probability, expections for a second rate hike are 18.5% in september and 33.6% in november.