The Federal Reserve Open Markets Committee continues in its pursuit of defeating stubbornly high levels of inflation. The magnitude of this rate increase had been anticipated by the market for some time and was reinforced by the latest inflation figures for June which were higher than economists’ expectations.
In terms of forward guidance, the statement continues to read that “ongoing increases in the target range will be appropriate”. Powell shied away from making any specific suggestions for what would happen at future meetings, saying “It’s time to just go to a meeting-by-meeting basis and to not provide the kind of clear guidance that we had provided”.
He did point to the “dot-plot” published after last month’s meeting, which suggests rates rising to 3.5% by the year-end before going on to hit 4.0% in 2023. It should be noted that there is a deviation between this and the expectations of futures market participants, who see rates peaking at around 3.5% by the year end but then falling through 2023, albeit slowly. The Fed will update the dot plot at their next meeting on the 21 September.
Powell also hinted that it “likely will become appropriate to slow the pace of increases”, which prompted a rally in both the equity and bond markets. He did balance that remark with “While another unusually large increase could be appropriate at our next meeting, that is a decision that will depend on the data,”.
In terms of the outlook for economic growth the statement did, for the first time, refer to “softening spending and production indicators” but continued to point to the robust jobs and employment data. The difference between dot plot projections and market expectations for the future path of rates indicates that market participants are becoming more concerned with the growth outlook. Less specific guidance on where the Federal reserve might be headed on a month-by-month basis will leave investors to make their own mind up based on the data as it is released.
This latest action by the Federal Reserve leaves in little doubt their intention to get inflation back under control. Powell told reporters that, “Restoring price stability is just something that we have to do”. He did also say “We do see that there are two-sided risks”, referring to balancing act of tackling inflation while not tipping the economy into a downturn.
The Fed’s recognition of these risks to growth should limit the potential for future upside rate surprises, which will be welcomed by both equity and bond market investors.