Good public speakers frequently use a technique called a ‘pregnant pause,’ which involves a period of silence, but a silence that leaves their audience anticipating that something significant is to follow.
In some ways, the past 6 weeks have felt similar. On June 14, at the conclusion of the previous FOMC meeting, Fed Chair Powell announced that the Fed Funds rate would be held steady at the range of 5.00 – 5.25%, yet concurrently the infamous ‘Dot Plot’ chart within June’s SEP document indicated that FOMC members’ median expectation was for 2 additional 25bp rate hikes in 2023. At first, this was somewhat difficult for markets to digest, but in his press conference, Powell clarified that this particular pause merely represented a further reduction in the pace of rate hikes. So, this pause was also laden with the expectation that further rate hikes (likely 2 of them) were anticipated before the end of the year.
Fast-forwarding to today, markets fully expected the first of the remaining two hikes to take place, and that’s exactly what happened. The FOMC announced that they would be raising their policy rate to a range of 5.25 – 5.50%, the highest level since March 2001.
The FOMC Statement
The statement contained minimal changes, aside from the decision to raise the Fed Funds rate and the description of economic activity expanding at a moderate (instead of modest) pace. The statement also continued to stress the committee’s data dependency.
Highlights from Powell’s Prepared Remarks and the Press Conference
From Powell’s opening remarks:
“We will continue to make our decisions meeting by meeting, based on the totality of the incoming data and their implications for the outlook for economic activity and inflation as well as the balance of risks. We remain committed to bringing inflation back to our 2% goal and to keeping longer-term inflation expectations well-anchored. Reducing inflation is likely to require a period of below-trend growth and some softening of labor market conditions. Restoring price stability is essential to set the stage for achieving maximum employment and stable prices over the long-run.”
The very first question Fed Chair Powell received was on the extent to which additional hikes may be appropriate, and whether all future meetings were to be considered ‘live meetings’ or if every other meeting pace was to be expected.
He replied essentially that every meeting would be a live meeting, and that they would look at the totality of incoming data. He noted that between now and the September meeting there will be 2 more CPI prints, 2 more job reports, and other data on economic activity. It would be possible to hike or to hold steady in September.
Later he was asked – Why wouldn’t he pause today if the Fed was data-dependent?
He responded – We are trying to achieve a stance of policy that’s sufficiently restrictive. As of the last meeting our median expectation was for 2 additional rate hikes. The incoming data since then was broadly consistent with our expectations. Yes, the inflation report was better than expected, but we’re going to be careful about taking too much from a single reading.
Later another reporter asked – Given growth surprises to the upside, unemployment mostly to the downside and inflation to the downside, is monetary policy really restrictive enough now?
Powell replied “A broader picture of what we want to see is easing of supply constraints and a normalization of pandemic-related distortions to demand and supply… But policy has not been restrictive enough for long enough to have its full desired effect. We intend to keep policy restrictive until we’re confident that inflation is coming down sustainably towards our 2% target. We’re prepared to further tighten if that is appropriate. The process still probably has a long way to go.”
Yields in the treasury market did not move on the announcement of the hike but rallied slightly (1-5bp across the curve) during the press conference.
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