Powell: “We’re Not In a Recession”
As expected, the Fed hiked 0.75% for the second consecutive meeting, bringing Fed Funds to a range of 2.25%-2.50%.
In their press release, they acknowledged that “recent indicators of spending and production have softened,” or in other words, both demand and supply side inflation pressure are starting to subside.
In response, the 2T slid 8bps to 2.98% while the 10T climbed a meager 3bps, to 2.78%.
In his post-meeting press conference, Powell seemed to really drive home two major points:
- Despite signs of weakening supply and demand pressures, recent job gains and low unemployment levels point to a strong labor market
- For that reason, we’re not in a recession
When asked about how the Fed’s policy would shift if the US was in a recession, Powell initially danced around the question. Asked another way, how will the Fed justify hiking during an economic downturn? Well, one approach could be just not acknowledging we’re in one.
Citing a strong labor market, the Fed doesn’t believe we’re in a recession. Powell also defended that even if GDP were to print even slightly below the meek 0.3% expectation and come out negative, it should be taken with a grain of salt.
But even if the Fed acknowledged we could be in a recession, would that actually be enough to shift their stance? They’re already actively pushing markets into restrictive territory and believe “it’s necessary to have growth slow down.”
With this meeting’s hike, the committee believes they’ve landed at neutral with the 2.25%-2.50% range but acknowledged they’ll “need to get policy to at least a moderately restrictive level,” which could involve continued, aggressive tightening into 2023.
If they follow their own projections, this means we could see Fed Funds at 3.50% by the end of this year.
Post-meeting, markets put Fed Funds at 3.25% by the end of the year, which would imply a 75bp hike at their next meeting and 25bps at each of their next meetings. Or, this could mean a couple slower 50bps hikes before they begin hiking in 25bp increments.
When asked about the magnitude of the next hike, Powell responded, “although another unusually large increase could be appropriate at our next meeting, that will ultimately depend on the data we see between now and then.”
He was also asked why they didn’t hike 100bps despite CPI beating expectations this month, to which he commented, “we wouldn’t hesitate to make a larger move if the committee determined that was necessary.” In other words, he’s avoided taking a larger rate hike off the table like he did at the May meeting, when they wound up going through with a larger hike anyway.
The biggest drivers of the remaining rate hikes this year are going to be any data related to inflation and the job market, and we’ve got big ones coming in over the next few days. First, GDP and PCE (Fed’s preferred measure of inflation) this week, and non-farm payrolls next week. Keep an eye out for these as cues for the future path of rates.