FOMC Recap -- Hawkish Pause

Desk notes: FOMC recap

The Federal Reserve yesterday left interest rates unchanged at 5.00 - 5.25%, as expected. Through increasing its rate outlook and reiterating its focus on reigning in inflation, we saw the FOMC meeting as hawkish.

1. Every quarter the Federal Reserve provides a Summary of Economic Projections (SEP), where FOMC members disclose their outlook on a variety of economic variables. This FOMC meeting included the SEP as it coincides with the end of Q2.

2. Below is a screenshot of Q2 SEP summary table, outlining a (1) higher outlook of real growth this year, (2) lower unemployment, (3 & 4) higher core inflation, and (5) higher interest rates:

   

3. This outlook supports a soft landing, as described by scenario (1) in our June FOMC Preview. The big surprise here is that the new SEP points to two further rate hikes (up from one more expected) this year, which also coincides with scenario (3).

4. When asked why the Fed didn’t just go ahead and hike at this meeting, Chairman Powell said the decision to pause/skip was due to the desire to slow the pace of rate hikes given how quickly they moved up since last year.

In our view is that, while the Fed is unlikely to commit to two full hikes, July is clearly on the table. Markets, thus far, are not fully reflecting even a July hike (which would put the implied yield at 5.375):

Cross Asset Strategy

• With the Fed raising rate expectations for the year, we believe deeper inversion is likely, which will support duration and tech stocks.

• In the near-term, we see economic data supporting a July hike (which we think is a mistake), and which may have an impact on equities more broadly.

Thank you for reading.