Evening Brief – 06.15.23
The Federal Reserve delivered on its “hawkish pause”, concluding a string of 10 consecutive interest rate hikes; however, the FOMC signaled additional tightening may still be in the pipe, evidenced by the hawkish dot-plot projections, which signaled two more 25-basis-point hikes this year.
The projections also saw 2023 core PCE revised up to 3.9% from 3.6% in March, which will certainly remain a concern for the committee. Powell said the process of getting inflation back to the 2% target “has a long way to go.”
It should be noted, however, that at the June 2021 FOMC meeting the median dot-plot for the end of 2023 was just 0.6%, so nothing is set in stone. Fed Chair Jay Powell cautioned against reading too much into the dots.
US Treasury yields rose, and equity markets sold off after the post-announcement conference but recovered and closed largely unchanged. Today, however, we saw a more aggressive selloff in rates, which has taken short- and long-end yields up to their highest level since the Silicon Valley Bank collapse. Meanwhile, the 2s/30s yield spread inverted further to its most since the SVB collapse.
The pause allows the committee to “assess additional information and its implications for monetary policy” and to determine “the extent of additional policy firming that may be appropriate.”
Despite mixed signals from many Fed officials since the April meeting, Powell’s message was consistent with a June pause, and not a full-stop, noting all members “expect that it will be appropriate to raise interest rates somewhat further by the end of the year.”
Powell’s comments did contain some additional hawkish slants, including a strong push back against the idea of rate cuts later in 2023, highlighting that “not a single person on the Committee wrote down a rate cut this year, nor do I think it is at all likely to be appropriate”, noting sticky core inflation.
According to the CME Fed Watch tool, there is now a 69% chance of a hike in July. Yet, markets are still not convinced the central bank can or will meet the dot-plot expectations, with futures still only expecting one more hike before policy tightening ends.