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The much-anticipated May Federal Open Market Committee (FOMC) meeting gave the financial markets what was expected and then some. The FOMC raised the fed funds rate for the tenth time, this time by 25 basis points, to a range of 5% to 5.25% as advertised. The committee also gave the markets a hint of a forthcoming pause. The FOMC carefully constructed a message that allowed it to keep its options open with strong undertones of being close to the end of its interest rate hiking process. The official press release had two meaningful changes:
- Removing “recent developments likely to result in tighter credit” to “tighter credit conditions…. are likely to weigh on economic activity …” the Committee admitted that credit conditions have become tighter, and officials are carefully watching for the impact on the economy.
- Changing “the committee anticipates that some…firming may be appropriate” to “in determining the extent to which …firming may be appropriate…” the committee suggested the fed funds rate may be close to the right level which specifically gives the committee the opportunity to stop raising rates at some point.
Throughout the post-announcement press conference, Federal Reserve Chair Jerome Powell made it clear the Fed is sticking with its 2% inflation target, it has no plans to cut rates this year, credit tightening may be doing some of the Fed’s work, and future decisions will continue to be data dependent. When asked why the committee voted for an additional rate hike at this time, Powell said the Fed is trying to reach and maintain an extended period of restrictive rates in order to slow inflation. Committee members feel like they are getting close to that level or may already be there. There was strong support to raise rates at this meeting
The issue of the tightening credit conditions came up repeatedly in the Q&A portion of the press conference. Powell said it is difficult to quantify how tighter credit conditions will translate into the equivalent of rate hikes. The Fed will take into account forthcoming lending data when deciding how to adjust rates going forward. When asked if current policy rates are sufficiently restrictive, Powell said that it is not possible to accurately say yes or no at this time, but the committee will continue with ongoing assessments before declaring victory. While most economists and traders expect this to be the last rate increase before the Fed pauses, the fed funds futures market is projecting a 56% chance for a rate cut in August.
Key Indicators this Week
Jobs – The U.S. added 253,000 jobs in April, much more than the expected 185,000. The two-month revision subtracted 149,000 jobs, but that doesn’t erase the fact that the job market is still strong. The unemployment rate shifted lower to 3.4% from 3.5%. While the Fed wants this number to move higher, the positive aspect is that more people are coming back into the labor force. The share of people aged 25-54 rose to 83.3%, the highest since 2008. Getting more people willing to work may, in effect, help loosen the job market, rather than the Fed’s plan for decreasing the demand for workers. Job gains were broad-based with increases in health care, professional and business services, as well as leisure and hospitality. Earnings rose 0.5% for the month, the most in about a year, and 4.4% from a year ago. All in all, the report is enough to keep the Fed on track for “higher rates for longer.” Next week’s inflation reports will be even more important for the Fed.
Sarina Freedland – Senior Investment Officer
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