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It is beginning to feel like the home stretch. The Federal Reserve raised rates for the 11th time out of 12 meetings, the Dow surpassed 11 (actually, 13) consecutive positive closes and the Fed may have done its last, or near last, rate increase to curb inflation. As expected, the Federal Open Market Committee (FOMC) increased the benchmark lending rate by 25 basis points, to a range of 5.25% - 5.50%, this week by unanimous vote. This is the highest rate in 22 years. The press release issued by the committee was basically identical to the June press release with just a few minor changes. The only significant change, aside from maintaining to raise the target rate, was an upgraded assessment of the economy from “modest” to “moderate” growth. The committee vowed to continue “to assess additional information and its implications for monetary policy,” a phrase that has been repeated often over the past 17 months. The phrase takes on additional meaning now as the Fed has switched from a forward guidance auto-pilot mode to viewing each meeting as “live,” whereas the incoming data will drive future decisions. In Federal Reserve Chair Jerome Powell’s words, “it is possible to raise rates or hold steady in September.” Powell was very careful throughout the press conference to not lean in either direction for the next rate move. With eight weeks of data to digest before the next rate decision is made, the Fed is going to be looking at the broader picture of the economy for signs of moderate growth, seeing if supply and demand come into better balance with a keen focus on the labor market and, of course, watching the path of inflation.
Powell made two important points regarding the inflation target and monetary policy. The Chair does not believe it is appropriate to keep hiking rates until inflation reaches 2%, but rather move back to a neutral position when the Fed sees inflation moving sustainably lower. Powell anticipates ending rate hikes long before inflation reaches the Fed’s target. As for cutting rates, Powell was firm in saying rate cuts will not happen this year and will only happen when the committee is comfortable that inflation is headed steadily towards 2%. Powell does not believe inflation will hit 2% until 2025.
Key Indicators this Week
GDP – Despite additional interest rate increases during the second quarter, the economy continued to surpass expectations and managed to grow. The initial GDP estimate for April through June came in at 2.4%, the best performance since the end of 2022 and higher than economists had expected. Growth was spurred by both consumer and business spending. Consumption increased 1.6%, much lower than the 4.2% surge in the first quarter but a stronger performance than expected. Keep in mind, the financial markets react to actual versus expectations rather than prior readings. Spending was three times stronger on services than on goods, a trend that has been happening since the pandemic recovery. Business spending rose at the fastest pace in more than a year, bolstered by equipment and real estate investment. Residential investment fell for the ninth-straight quarter as housing continues to suffer from high prices, high rates and low inventory. Expectations for a recession continue to get dismissed or pushed into 2024.
Inflation – The Fed's preferred measure of inflation, PCE year-over-over, fell from 3.6% to 3.0% in June. Besides being the lowest number in over two years, the pace of the decline is the largest since the beginning of the pandemic. A fast pace of decline is a good step towards the Fed’s goal of “sustainably lower” inflation.
Sarina Freedland – Senior Investment Officer
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