FOMC Update: 25bp Hike
Fed signals a soft landing is the base case
The Federal Reserve raised interest rates by 25bp today. Here are our notes from the press release, Q&A, and some reactions:
The Federal acknowledged a slower economy, with growth subdued, but sees no recession as their base case in 2023.
Views the labor market as imbalanced, with hiring still rampant and the unemployment rate very low.
Says long term inflation expectations remain anchored; however, no room for complacency as the longer inflation remains elevated the greater the risk of inflation expectations rising.
Sees monetary policy as having long and variable lags, “we are at the beginning of disinflation”.
From the Q&A:
Says financial conditions have tightened, is not focused on short term moves and is seeking a long term level of sustained tightness.
Disinflationary process is in the early stage, but core services inflation remains high: “we are seeing progress”.
Noted that the FOMC has no desire to over tighten; Powell’s base case for 2023 is a soft landing with no cuts this year, and saw disinflation without rising unemployment as a good thing (though hinted he still expects unemployment to move higher from the current level of 3.5%).
We saw todays presser as balanced, with Powell choosing not to push back against easing financial conditions, while simultaneously stressed that the job isn’t done and that rates will remain high until inflation moves back to target (2%).
Blackrock’s Jeff Rosenberg says there’s a disconnect between market pricing and Fed comments, and suggested that the Fed might want to push back against the recent easing of financial conditions.
Ian Shepard of Pantheon Global Macro was surprised that Powell did not acknowledge that 3m annualized rate of core PCE (a measure of inflation) has moved back to target.