Fed is Pivoting

Yesterday (July 27) Fed made the 2nd increase of the Fed rate on 0.75%. The first time was June 15. The most important things as usual are FOMC statement, Powell’s opening remarks and Powell’s Q&A.

FOMC statement

Recent indicators of spending and production have softened. Nonetheless, job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.

Russia's war against Ukraine is causing tremendous human and economic hardship. The war and related events are creating additional upward pressure on inflation and are weighing on global economic activity. The Committee is highly attentive to inflation risks.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 2-1/4 to 2-1/2 percent and anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve's Balance Sheet that were issued in May. The Committee is strongly committed to returning inflation to its 2 percent objective.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

And a paragraph from the Opening Remarks

Over coming months, we will be looking for compelling evidence that inflation is moving down, consistent with inflation returning to 2 percent. We anticipate that ongoing increases in the target range for the federal funds rate will be appropriate; the pace of those increases will continue to depend on the incoming data and the evolving outlook for the economy. Today’s increase in the target range is the second 75 basis point increase in as many meetings. While another unusually large increase could be appropriate at our next meeting, that is a decision that will depend on the data we get between now and then. We will continue to make our decisions meeting by meeting and communicate our thinking as clearly as possible. As the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases while we assess how our cumulative policy adjustments are affecting the economy and inflation. Our overarching focus is using our tools to bring demand into better balance with supply in order to bring inflation back down to our 2 percent goal and to keep longer-term inflation expectations well anchored.

Comments from Q&A

I don’t think US is currently in a recession

Interest rates have reached a “neutral level”

So that means dovish signals while some media called this still a hawkish meeting.

Labor market reports will be in focus. Until contraction in economic activity goes to labor market, Fed can assume that we are not in a recession.

But inflation is still high and show no signs of pivoting. So that means a complicated road for the Fed:

• Argue that inflation will slow down in the future and shift focus on the labor market (maximum employment mandate)
• Return to 0.75% hikes in 3-6 months when it’s clear again that inflation is not slowing down

For now, this is good for growth stocks sensitive to cash flows in the distant future, namely tech stocks.

Since the last rate hike on June 15 Nasdaq is up 9%. Will today’s data that GDP fell 0.9% in Q2 spoil Nasdaq growth until the next Fed meeting on September 21?

---

Tags: Fed, Inflation