At the last Federal Reserve Open Market Committee Meeting, the Fed shocked markets with a three-quarters of a point rate hike. It delivered the same move today, taking the funds target rate to 2.5% - matching the high in 2019. Some had speculated that J. Powell and crew would follow the Bank of Canada’s lead and move rates a full point, but there has clearly been enough evidence of a summer cooling of the economy to keep the Fed in line with market expectations.

 

We have talked about this transition in economic activity over the last several weeks and it is no surprise that 75% of market economists now expect some sort of recession to develop. At the same time, corporate earnings have sent mixed messages from resilience (as seen in some financials and tech companies) to despair, as in the case of Walmart. The Committee is also very careful not to entrench a deep belief by market participants that there is a “Fed put” in play. In other words, it doesn’t want the market to rally on the view that the terminal (peak) rate is close at hand and that it is prepared to start cutting rates quickly in 2023. We actually believe this could still be the outcome, but July is too soon to start feeding that expectation.

 

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Keeping in mind that there is no dot plot following today’s announcement, Chairman Powell will have to remain sensitive to the language used in the press conference at 2:30pm. The Fed reiterated that it’s “highly attentive to inflation risk” and that it “anticipates that ongoing increases in the target range will be appropriate,”. With weakening spending and production data but none the less  the unemployment rate has remained quite low throughout the recent deceleration. This is a status quo statement and market participants will look to the Fed to remain committed to battling inflation with as little damage to the economy as possible, but with 2 CPI readings ahead, it will be a long road to the September meeting.

 

On behalf of the Pyle Group, have a wonderful day.

 

Ally Pyle

 

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