An Expected Move but Likely Not Yet Finished

July 27, 2023

We believe Fed Chair Powell’s message was that the Fed is not yet done with inflation proving stronger than forecasted coming out of 2021.

As expected, yesterday the Fed announced an increase in the target range of the federal funds rate of +0.25% to 5.25%-5.50%, marking the highest level in 22 years; the decision was unanimous. Following the softer-than-expected inflation prints for June, the likelihood of a hike higher than +0.25% fell precipitously. As a result, there was little market movement following their release.

Generally, there were very few changes to the Fed’s statement. The Fed acknowledged that “economic activity has been expanding at a moderate pace,” versus a “modest pace” in their June statement, noting that the Committee “will continue to assess additional information and its implications for monetary policy.”

During the press conference, Fed Chair Jerome Powell’s comments were consistent with the narrative over the last several months. Powell confirmed that the Fed is taking a meeting-by-meeting approach, citing the better-than-expected inflation data as just one data point and acknowledging that there will be two months of data to assess at the September meeting. In addition, Powell noted that the Fed is still “strongly committed” to getting inflation back to 2% and that “it will take time” for the full effects of tightening to transmit to the economy. He also cited the continued imbalance between labor supply and demand, and that getting back to price stability will require a period of sub-par economic growth and likely (emphasis mine) some softening in the labor market.

To summarize, we believe Fed Chair Powell’s message was that the Fed is not yet done with inflation proving stronger than forecasted coming out of 2021. However, he also admitted that given the rapidity of rate hikes over the last 16 months, the Fed can “afford to be a little patient” and the emphasis on data dependency and admission of tighter credit conditions could be translated as a slightly more dovish tone.

Overall, in our view, yesterday’s action, statement, and press conference are likely to have little impact on markets in the short term – Fed watchers are fixated on Jackson Hole and the September meeting. Improving economic data could be the catalyst for the Fed to stay higher for longer and perhaps create a “good news is bad news” scenario as we move into the fourth quarter. Conversely, economic indicators could deteriorate modestly, which may force the Fed’s hand towards a more accommodative posture before core inflation reaches the all-important 2% level. Even in the event of continued contraction, in our opinion, the threat of a deep and protracted recession continues to subside – supporting our shift to neutral in equities and creating some comfort for investors that a dramatic selloff is less likely as we move into the back half of the year.


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