FOMC - July 27 2023

Hi All,

Today, I will go over the Fed's July FOMC meeting statement, key takeaways, market reaction, and what to expect going forward.

◆ U.S. Stocks: Dow +0.23%, S&P 500 -0.02%, Nasdaq -0.12%
◆ U.S. Bonds: 10-year Treasury yield 3.865% (-2.7 bps), 2-year Treasury yield 4.858% (-2.1 bps)

Fed's statement can be found here. Chair Jerome Powell's press conference. Press conference transcript.

🏈 Bottom line: The FOMC raised the benchmark interest rate by 25 bps, bringing the U.S. benchmark rate to 5.25-5.50%, the highest since 2001. The decision was unanimous.

• 25 bps hike as expected: Jerome Powell stated, "I would say it is certainly possible that we would raise funds again at the September meeting, if the data warranted, and I would also say it's possible that we would choose to hold steady at that meeting." He emphasized that they would consider data from two Consumer Price Index (CPI) reports and two employment reports in July and August, among other data, before making any further decisions. The decision to leave the possibility of additional rate hikes open.

Market reactions:

The New York stock market started the morning with slight volatility. There was almost no response to the expected monetary policy statement, and although there was a momentary surge during Powell's press conference, it quickly returned to where it began. The FOMC meeting and Powell's press conference did not have a significant impact on the market.

The New York stock market concluded trading at similar levels just before the FOMC statement was released, which was as expected. The Dow rose by 0.23%, while the S&P 500 index declined by 0.02%, and the Nasdaq fell by 0.12%. The Dow recorded its 13th consecutive trading day of gains, extending the longest streak since January 1987.

In the New York bond market, U.S. Treasury yields showed a slight decline. At 5 p.m., the 2-year yield decreased by 2.1 bps to 4.858%, and the 10-year yield dropped by 2.7 bps to 3.865%. Yields fell by around 5 bps after Chairman Powell's remarks. Bond market participants explained that there were concerns that Chairman Powell would make hawkish comments, but the statements were perceived as neutral or slightly dovish.

The FOMC statement key takeaways:

• Minimal Changes in the Statement: The statement had minimal changes from the June statement. The assessment of recent economic activities was changed from "modest" to "moderate" pace of expansion. This implies that the U.S. economy has strengthened slightly.
• Powell Leaves the Door Open for Rate Increases: Powell stated, "Looking ahead, we will continue to take a data-dependent approach in determining the extent of additional policy firming that may be appropriate. I will have more to say about monetary policy after briefly reviewing economic developments." He emphasized that there is a possibility of raising rates in September.
• Powell mentioned the importance of upcoming data, including two CPI reports (July and August) and two employment reports (July and August) as well as the Employment Cost Index (ECI) released last Friday.
  He also emphasized that the Fed has raised the current benchmark rate by 525 bps since March 2022, and monetary policy is becoming more restrictive.
• Caution on Further Tightening: Powell expressed caution regarding additional tightening, as policy becomes more restrictive, and inflation-adjustment rates increase, posing risks associated with excessive tightening.
• Still Monitoring: Powell mentioned that the June Consumer Price Index (CPI) report was welcomed but was only for one month and one data point. They still need to see continued moderation in inflation. Powell emphasized the significance of wages in the labor market for further inflation moderation.
• Possibility of Soft Landing: Powell believes there is a possibility of a soft landing. Fed staff predicted a noticeable growth slowdown by the end of this year, but considering recent economic resilience, they are not predicting a more severe recession.
• Long-Term Rate Maintenance: Powell emphasized that rates have not been restrictive enough to have sufficient policy effects. They plan to maintain a restrictive approach until they are confident that inflation will continue to decline towards 2%. He does not believe inflation will return to 2% by 2025. (Does this mean no rate cuts next year?)
• Quantitative Tightening (QT) with Rate Cuts: The Fed can continue with QT while lowering rates in specific situations. This could happen when they are normalizing the restrictive rates to more typical levels.
• In summary, Powell suggests the possibility of performing QT while lowering rates by 2025 if inflation is confidently moderating towards 2%. There is minimal difference between this June's FOMC and the previous one.

What to expect going forward

The end of the rate hiking cycle?

• Wells Fargo believes today's rate increase will likely be the last of the tightening cycle, but another rate increase before year-end won't shock the market. They also expect quantitative tightening to continue.
• BMO expects significant data to be released before the September meeting, and if growth and inflation don't decelerate enough, the Fed may skip the September rate increase and consider November instead.
• ING anticipates inflation to remain around 2% and economic activity to slow below trend, leading to a likely hold on rate increases in September, but keeping the option open for further increases until year-end.
• Goldman Sachs predicts rate cuts to begin in the second quarter of next year, reducing rates to 3-3.25% after 25 bps cuts at each meeting.
• Morgan Stanley mentions that the base effect will diminish in the second half of the year, and if inflation doesn't sufficiently slow down, it may rise again, leading to potential aggressive tightening by the Fed.
• Goldman Sachs's bond strategist points out that recent data aligns with the expectation that the benchmark rate peaked in July, but if key data shows inflation picking up, the Fed may continue rate hikes.