Why would the Fed loosen the monetary brakes, but at the same time promise to step down even harder later? Puzzling policy decisions can involve economic and political factors.
In case you missed it, the FOMC voted last week to keep its federal funds target range at 5% to 5.25%, after raising the key policy rate 10 times, for a total of 5 percentage points, more than the past year and 1 quarter. The pause in rate hikes was widely expected after Fed Governor Philip Jefferson, nominated to be the central bank’s vice chairman, sent a telegram.
But the FOMC also raised its year-end forecast for the federal funds rate The median is 5.6%, up half a percentage point from its last summary of economic forecasts released after its March 21-22 meeting. Also, no one of the 18 panelists expected a rate cut later this year, contrary to market expectations a month ago for a cut of half a percentage point or more at the mid-December meeting.
A number of Fed officials will deliver their outlook on the economy and monetary policy in the coming days, including Chairman Jerome Powell, who is due to make his semi-annual congressional appearance before the House Financial Services Committee on Wednesday.
In the meantime, let’s look at the showdown side of FOMC action. There was no dissent at the past week’s meeting, continuing the central bank’s recent consistency.
Therefore, all voters agree Committee’s justificationwhich said, “Leaving the target range unchanged at this meeting allows the Committee to assess additional information and its implications for monetary policy.”
This will include the employment and consumer price index reports for June, which are due ahead of the July 25-26 FOMC meeting. Fed officials should also learn more about any fallout from the recent collapse of Silicon Valley Bank and other banks on the availability of credit.
The FOMC statement made no mention of the impact of a suspension of the federal debt ceiling and a sharp increase in Treasury borrowing to replenish government coffers. This process removes liquidity from the financial system, which some estimate is equivalent to a 25 basis point hike in the federal funds rate.
In his post-meeting news conference, Powell responded to a question related to this, saying: “As the Treasury refills [Treasury General Account]”
By not raising rates now, the Fed may be buying time to minimize the impact of Treasury borrowing (nearly $300 billion in the past week alone), according to the Strategas policy team led by Dan Clifton. .
The 4-week T-bills that were auctioned last Thursday offered an investment rate of 5.113%, a steep price for Uncle Sam and stiff competition for banks, especially small and medium-sized institutions, especially given the debt relief. State and local income taxes. Another 25bps rate hike to 5.25%-5.50% before the July 26 meeting (74% chance as of Friday, according to data) CME FedWatch website), the Fed effectively gives the Treasury and banks some extra breathing room.
Meanwhile, as noted above, the FOMC raised its median year-end fed funds forecast to 5.6%, implying two 25bp hikes. The increase reflects revised economic forecasts. In particular, the Fed raised its year-end estimate for its main inflation measure, the core personal consumption expenditures (PCE) deflator excluding food and energy prices, to 3.9% from 3.6% in the March summary of economic forecasts. The unemployment rate is now expected to end the year at 4.1%, compared with a previous forecast of 4.5%, up from 3.7% in May.
Deutsche Bank economists wrote in a note to clients that Powell sounded pessimistic about progress in curbing inflation. As I noted in my Up & Down Wall Street column last week, core PCE growth was 4.3% in the most recent three months to April, only slightly slower than the 4.7% growth rate over the past 12 months. That’s more than double the Fed’s 2 percent target.
To get to 2%, the Fed is targeting a level of interest rates it deems “tough enough.” That would mean U.S. Treasury yields well above inflation across all maturities, Powell said in November, Jim Bianco, the namesake of Bianco Research, warned clients on a conference call last week. That would bring the benchmark 10-year yield to 5.25%, well above Friday’s 3.76%, he added.
Bianco’s conclusion that inflation is causing all Americans to lose real purchasing power means that Powell & Co will emphasize lowering inflation even if it means higher unemployment.
Economics aside, this could be a good political strategy. By raising rates further this year to curb inflation, the Fed has room to lower rates during the 2024 election. Call me cynical, but it would be naive to ignore the politics of any Washington establishment, including the Fed.
write to Randall W. Forsyth Email: firstname.lastname@example.org
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