SNAP ANALYSIS: Fed pivots to meeting-by-meeting, data-dependent approach

The Fed’s rate decision and statement was in line with expectations, acknowledging some of the downside seen recently; the post-meeting press conference was dovish, with Chair Powell essentially impressing that the Fed was going to be taking a data-dependent, meeting-by-meeting approach, rather than flagging the increment of rate hikes that the Committee would debate. 

• The FOMC lifted rates by 75bps to 2.25-2.50%, as was expected, taking rates back to neutral for the first time since 2019. The only major tweak to the statement was its reassessment of the economy; the Fed now acknowledges that “recent indicators of spending and production has softened” (recall, it previously said that “overall economic activity appears to have picked up after edging down in the first quarter”). This change was to be expected given the softening in many key macro indicators.


• Going in to the rate decision, a very small minority of analysts were suggesting that the Fed could slow the pace of its balance sheet normalisation, but the central bank has opted against doing so.


• The statement offered no clues about what the Fed would do at its September meeting, but at his post meeting press conference, Chair Powell was more explicit, stating that over the coming months, the Fed was looking for compelling evidence that inflation is coming down, and the pace of future rate hikes would depend on incoming data and the outlook for the economy. This essentially suggests that the Fed will be data-dependent, and act on a meeting-by-meeting basis, rather than flagging policy in advance.


• Powell did, however, say that another large rate hike could be appropriate at the next meeting, and argued that the Committee wanted to get rates to moderately restrictive territory, which he suggested was between 3.0-3.5%. According to the June SEP, rates will be at this level by the end of this year (these forecasts will be updated in eight weeks' time, but Powell referred journalists to the June SEP when asked about his economic views); money market pricing, which had expected rates at 3.4% by end-2022 before Powell spoke, had eased to around 3.3% as the Fed Chair was speaking, implying that a rate rise to 3.25% was fully priced, with around 20% probability that rates would be lifted to 3.25-3.5%.


• Money markets are however pricing a degree of rate cuts next year; Powell was asked if his view of the terminal rate has changed (the June SEP implies this sits at 3.75-4.00%), and he responded that it had evolved for all participants on the Committee, and added that the Fed will have more data by September.


• Naturally, Chair Powell was quizzed on whether the US economy was in a recession; Powell seemed reticent to use the phrase, but reiterated that it was necessary to slow growth in order to create some slack in the economy, to allow the supply-side to catch-up; Powell also said that the slowdown in Q2 was notable, but the economy was still on track to grow this year, and demand was strong.

27 Jul 2022 - 20:23- Fixed IncomeResearch Sheet- Source: Newsquawk