As we noted in our FOMC meeting preview, the market was always skeptical that Jerome Powell and company would go with a full 100bps (1.00%) rate hike, and as we’ve just seen, that skepticism was well placed: The Fed opted to raise interest rates by 75bps (0.75%) to the 3.00-3.25% range, as widely expected.
Despite the lack of headline surprises, there is still plenty to chew over from the FOMC meeting across the monetary policy statement, Summary of Economic Projections (SEP), and Jerome Powell’s press conference, which is just winding down as we go to press.
Monetary policy statement
On balance, this meeting’s monetary policy statement saw the fewest changes relative to the previous month’s statement in recent memory. The only non-grammatical / mark-to-market change was an acknowledgement that recent indications of spending and production “point to modest growth” (vs. “have softened” last month).
Needless to say, that minor tweak wasn’t a big market mover, though it is worth mentioning something that wasn’t in the statement: Any sign of an upcoming “pivot” or even a pause from the US central bank.
Thankfully, there were some interesting developments in the accompanying Summary of Economic Projections, including the infamous “dot plot” of interest rate forecasts…
Summary of Economic Projections
There were a number of major updates to the central banks economic and interest rate forecasts:
- The median projected real GDP growth was revised down in 2022 (1.7% -> 0.2%), 2023 (1.7% -> 1.2%), and 2024 (1.98% -> 1.7%).
- The median projected unemployment rate was revised up by 0.1%, 0.5% and 0.3% in 2022, 2023, and 2024.
- The median projected PCE and Core PCE inflation rate was similarly revised higher for 2022 and 2023.
Overall, the changes to the Fed’s economic forecasts suggest slower growth, higher unemployment, and higher inflation than previously anticipated, an ugly if not unexpected update to the central bank’s economic forecasts over the next couple of years.
Source: Federal Reserve
Likely in response to the higher inflation forecast, the Fed’s interest rate expectations were also revised higher across the board in 2022 (3.4% -> 4.4%), 2023 (3.8% -> 4.6%), and 2024 (3.4% -> 3.9%). As we noted with the monetary policy statement above, the Fed’s own interest rate forecasts show no sign of a pivot to rate cuts until 2024, signaling the central bank’s conviction about fighting price pressures, regardless of the costs.
Even looking out just until the end of this year, Fed members are projecting another 125bps of rate hikes, presumably with 75bps in November and 50bps in December.
Chairman Powell’s press conference
Chairman Powell is still speaking as we go to press, but with most of his comments behind us, Fed Chairman Powell has come off as slightly less hawkish than the statement and central bank’s economic forecasts. Highlights from Powell’s press conference follow [emphasis mine]:
- FED SEEKS RETURN TO `SUFFICIENTLY RESTRICTIVE' RATES
- PACE OF INCREASES TO DEPEND ON INCOMING DATA
- HISTORICAL RECORD CAUTIONS AGAINST PREMATURE RATE CUTS
- MAY SEE SOFTENING OF LABOR-MARKET CONDITIONS
- VERY LIKELY THERE WILL BE SOME SOFTENING IN LABOR MARKET
- MAY SLOW PACE OF HIKES AT SOME POINT TO ASSESS EFFECTS
- POWELL CITES FOMC SPLIT BETWEEN 100 BPS-125 BPS FOR REST OF YR
- AMOUNT OF PAIN DEPENDS ON TIMELINE TO 2% INFLATION GOAL
- HOUSING MARKET MAY HAVE TO GO THROUGH CORRECTION
While the initial comments about likely softening in the labor market implied that the Fed was willing to drive the US economy into a recession if necessary, his later comments about potentially slowing the pace of rate hikes and the possibility “only” 100bps more in interest rate increases this year took a little bit of the edge off his hawkish tone.
Market reaction
Mirroring seemingly every other Fed meeting so far this year, the market initially reacted to the seemingly hawkish statement and economic forecasts (stocks and other risk assets down, the US dollar and yields up) before reversing that move entirely on Fed Chairman Powell’s press conference.
Overall though, it feels like the Chairman “walked back” less of the statement than he recently has, and at the end of the day, the Fed came out as more hawkish, for longer, than most expected when they woke up this morning, so we could see a continuation of the recent trends (rising yields and US dollar, falling equities and risk assets) as traders digest the meeting over the rest of the week.