Today’s Federal Open Market Committee (FOMC) meeting brought with it the 10th successive Fed Funds rate hike in the past 14 months. During this time period, the target range has increased all the way from the “zero bound” to 5.00-5.25%. This has been the fastest sequence of monetary policy tightening in over 40 years, and for good reason – Headline CPI inflation hit a 40-year high of 9% back in mid-2022.
The Fed’s dual mandate is to foster maximum employment and price stability, but since inflation began its recent spike (and was subsequently determined not to be transitory in nature), price stability has taken a front seat for all FOMC members. But while it is true that these inflation measures have fallen significantly over the past year (Headline CPI from its high of 9% to 5%, Core CPI from 6.6% to 5.6%, Core PCE from 5.4% to 4.6%), they are still a far cry from the Fed’s stated goal of 2%.
Higher short-term rates create tighter credit conditions and work to curb aggregate demand. More recently, credit conditions have tightened further, as a result of stress within the banking sector and the collapse of three U.S. banks (and one very large multi-national bank) within the past two months. So this additional credit crunch acts as a tailwind, pushing the economy further towards the Fed’s goal.
However, Fed Chair Powell and the rest of the FOMC may soon find themselves caught between a rock and a hard place, as the negative effects of monetary policy tightening on the broader U.S. economy become more visible and a recessionary environment looms larger on the horizon. The inverted U.S. Treasury yield curve, surveys such as ISM Manufacturing, and other Leading Economic Indicators are all pointing towards a contractionary economic environment in the near future.
Today there was no Statement of Economic Projections (SEP) released by the Fed. The SEP will not be updated until the next FOMC meeting in mid-June, so for this meeting there is just the decision, the statement, and the press conference to discuss.
Some highlights from the FOMC’s statement:
- The Fed Funds Rate was raised 25bp, from a range of 4.75-5.00% to 5.00-5.25%
- The effects of tighter credit conditions on households and businesses remains uncertain.
- Instead of “the Committee anticipates that some additional policy firming may be appropriate…” the statement now reads “In determining the extent to which additional firming may be appropriate…”
which opens the door to a potential pause at the next FOMC meeting in June. - The decision to hike Fed Funds to the current level was unanimous (no dissenting FOMC members).
Highlights From Powell’s Prepared Remarks and the Press Conference:
- Conditions have greatly improved in the banking sector since early March.
- The Fed’s focus remains squarely on their dual mandate, and they remain strongly committed to bringing inflation back to 2%. Without price stability the economy does not work for anyone.
- The economy is likely to face further headwinds from tighter credit conditions. The full extent of these effects remains uncertain.
- Powell’s first press conference question was on whether the statement suggested a pause in June. He replied that the determination to pause was not made at today’s meeting. Later he clarified that
the assessment of the extent to which policy firming may be appropriate will be an ongoing one, meeting by meeting, with consideration of the factors mentioned in the statement. - When asked about the Debt Ceiling, Powell responded that this is a fiscal matter, but from their standpoint it is essential that the debt ceiling is raised in a timely manner, and a failure to do so would be unprecedented. He later stated that “We shouldn’t even be talking about a world in which the United States doesn’t pay its bills.”
- On the possibility of amending the Fed’s inflation target – The Fed will always have 2% long-term inflation target. We’re going to have to stay at this for a while.
- On why he’s optimistic that a recession can be avoided – It’s possible that this time really is different. The case for avoiding a recession is more likely in my view than the case for having a recession.
- When asked about the FOMC’s process and whether they are ruling out rate cuts – We have a view that inflation is going to take some time to come down. If that forecast is correct, it would not be appropriate to cut rates.
