The very first sentence of the FOMC statement unexpectedly downgraded the state of the US economy: "Recent indicators of spending and production have softened."
The third sentence, however, observed the elevated inflation (which the Fed naturally blamed on Putin because otherwise Biden would fire Powell): "Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures."
This, as Renaissance Macro's Neil Dutta put it best, means that "the Fed marked down its growth assessment and still ended up going as much as it did in June."
Translation: stagflation is here, and it is persistent.
For those who missed our extended kneejerk response to the FOMC statement, here is a snap analysis courtesy of Newsquawk
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 normalization, but the central bank has opted against doing so. The statement offers no clues about what the Fed will do at its September meeting: traders will be looking to Chair Powell s remarks for a guide here Money market pricing still expects the Fed will lift rates to 3 25-3.50% by the end of the year
Not enough? Below are some more hot takes from various Wall Street analysts:
Peter Bookcvar, Bleakly Financial Group
"The statement was a big yawner given that there were only modest changes to it relative to the June meeting.”
Anastasia Amoroso, iCapital’s chief investment strategist:
“There are few surprises in the 75-bps rate increase and the accompanying Fed statement. But one thing is clear -- the Fed still thinks this economy can withstand ‘ongoing increases’ in interest rates because while the economy is slowing, jobs growth is not yet stalling out. If there is any sense of an upcoming Fed pivot, there are no hints of it in this statement yet and looks like the Fed sees a runway to continue to raise rates.”
Sarah Hunt, portfolio manager at Alpine Woods Capital:
“They see some weakness in labor markets, but also see the high inflation numbers, so it’s a very mixed situation since the ‘strong labor economy’ has been the justifier for faster moves. And a slowing labor economy may be what they want some signs of but they don’t want that to go too far.”
Omair Sharif at Inflation Insights:
“Despite the downgrading of current economic conditions, which was expected, I wouldn’t be surprised to see the Chair repeat the idea that a 50-75 basis point move is the most likely path at the September meeting.”
“The unanimous FOMC decision to raise the interest rate by 75 basis at the July meeting sent a clear message: The Fed is nowhere close to declaring victory over inflation. While many are worried that the economy is teetering on the edge of recession, Fed officials appear to see the glass as half full, with a strong labor market allowing the economy to withstand rapid monetary tightening. Bloomberg Economics thinks there’s little chance that the Fed will pause its rate hikes later this year, as markets currently expect.”
Neil Dutta, Renaissance Macro Research:
“All I learned from the statement: The Fed marked down its growth assessment and still ended up going as much as it did in June.”
Peter Tchir, Academy Securities
Points out that Esther George had wanted to raise by only 50 basis points last time around and voted for 75 this month. “Honestly no idea what would have made someone more hawkish.”
Diane Swonk, KPMG Chief Economist
Powell needs to be determined in his press conference in addressing the risk of middle-class incomes being damaged for years to come unless the Fed succeeds in bringing down inflation. Swonk says the unemployment rate will likely need to climb to 5.5% -- from just 3.6% today -- in this fight.
Joe Gilbert, Integrity Asset Management:
“The Fed has remained measured and has tried once again to not surprise the market. Most of the rate hikes are behind us at this point. Every day we are getting closer to rate cuts next year. The press conference and Jackson Hole meeting will really be the drivers going forward.”
Frances Donald, Manulife Asset Management:
“This is no pivot, at least not yet. While the Fed acknowledges a slowdown in economic momentum, they are still hanging their hat on strong job growth (despite rising initial jobless claims and survey data suggesting a slowdown in job growth ahead). This doesn’t look like a Fed that has blinked. It’ll take a lot more than recession fears, clearly.”
Jimmy Chang, Rockefeller Global Family Office:
“It’s pretty much in line with consensus expectation. I would say the only messaging here, if there’s any slight pivot, is that they open with the line, ‘recent indicators of spending and productions have softened.’ So it’s kind of acknowledging they’re seeing some softness, but they quickly follow that with ‘nonetheless job gains have been robust. So again, to me, that’s the message that what they’re focused on is the job market. That the job market really has to deteriorate materially for them to pivot. And at this point the focus remains inflation.”
Ira Jersey, Bloomberg Intelligence:
“Powell keeps saying 2% to 2.5% federal funds rate being neutral may be somewhat optimistic. Inflation looks to remain well above 3% for several years; if so, then the Fed isn’t yet near neutral. The market rally since those statements is probably overdone near term. The knee-jerk rally and bull steepening may be more position unwinds of flattening trades, so the move may not turn into a medium-term trend.”
Mohamed A. El-Erian, Allianz
"Fed Chair Powell tends at times during his unscripted remarks to opt for undue specificity that can prove problematic later on. A poss example of this is his mention just now that interest rates are “at a neutral level” (followed by reference to “significantly more uncertainty"
Gokhman, AlphaTrAI Funds:
“So Powell just tacitly introduced 75bps for September while hedging by saying we’ll also slow down hikes when appropriate. To me that reads as hawkish with the secondary desire to not cause a panic selloff. Interesting that the immediate price reaction to that was to shoot up.”
Dennis DeBusschere, 22V Research weighs in again:
“Data-dependent and the comment on eventually slowing the pace of increases turns things around. This is something to fade longer term, if markets rally on it. But is what it is on the day. Seems like market reaching for dovish takes.”