FOMC Statement and Press Conference

May 3, 2023

Statement: As markets were expecting, the federal funds target was increased by 25 basis points to 5.0-5.25%. The new target ceiling for the first time matches the level existing when the sub-prime mortgage credit crisis first surfaced in the summer of 2007.

The statement justifying today’s action makes only a few modifications from the prior meeting’s statement of March 22. Most significantly, language about future rate hikes imply that conditions for such a need as possible rather than probable. Second, recent job gains are characterized as “robust” rather than “picking up.”

The two main similarities of the two statements are, first, that reducing inflation is clearly the overriding priority of the committee and, second, that the extent of tighter credit conditions on economic activity, hiring and inflation remain, as before, uncertain. Three short sentences continue to underscore the primacy of reducing inflation:

  1. Inflation remains elevated.
  2. The Committee remains highly attentive to inflation risks.
  3. The Committee is strongly committed to returning inflation to its 2 percent objective.

The severity posed by the strains felt by some mid-sized banks is downplayed by the repetition of the view expressed six weeks ago that “the U.S. banking system is sound and resilient.”

Powell’s Press Conference: Three issues dominated the Q&A: 1) whether and to what extent the bias toward higher interest rates has been modified, 2) lessons from the banking strains that have taken down three large banks since March, and 3) whether a U.S. recession is unavoidable. In none of this cases was ambiguity really cleared up.

The shift in language from the prior statement where the FOMC “anticipates that some additional policy firming firming may be appropriate..” and “determining the extend of future increases” to “determining the extent to which additional policy firming may be appropriate” to today’s statement, which combined with the revelation back at the March press conference that a pause wouldn’t be surprising after 5-5.25% level is reached, suggested to me that the current level is close, if not, the cycle peak. Expressing the view that the Fed is closer to the end than the beginning of the tightening cycle adds nothing meaningful. The rate is 500 basis points above the starting point and of course not going to be lifted to 10.25%. When pressed about whether rate hikes would be paused, Powell reverted to the mantra that decisions are made on a meeting-to-meeting basis depending on all information learned between now and next time. He also conveyed the committee’s widely shared view that it’s doubtful that inflation’s outlook would improve enough by year-end to permit a rate cut. It appears that the bias remains toward a hike, if in fact the rate is changed again in 2023.

Regarding banking strains, Powell’s most illuminating observation was that the removal of deposits from SVB and the other failures happened much more rapidly than bank runs from the past, but he was reluctant to give personal recommendations for banking supervision policy changes, given that that task has been assigned to Governor Barr.

Powell’s view remains that it’s possible that inflation can be returned to 2% without a recession, but he made clear that such is his personal belief and not necessarily shared by staff or a majority of the FOMC. Forecasts from March in fact seem to imply a modest recession with the jobless rate rising about a percentage point.

A fourth issue, really the 500 pound gorilla in the room, that came up in several questions involved what happens if the government defaults, which Treasury Secretary Yellen implied recently could happen in early June, that is sooner than estimated earlier. Powell didn’t take that bait, other than to affirm that the repercussions of such a development would be so costly as to make any publicly revealed preparatory plans irresponsible because doing so would lend legitimacy to that option. It is up to Congress, not the Fed, to avert that scenario, and the public needs to understand that the Federal Reserve does not have the tools to cover up the consequences of a fiscal default.

Market reaction during and after the press conference depressed U.S. share prices and the ten-year treasury yield. The dollar remained pretty steady against the euro but lost a bit versus the yen.

Copyright 2023, Larry Greenberg. All rights reserved. No secondary distribution without express permission.


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