FOMC Statement and Post-Meeting Press Conference
July 26, 2023
The FOMC as expected lifted the federal funds target range by 25 basis points to 5.25-5.50%. The vote behind this action was again unanimous. Eleven straight meetings resulting in a rate hike had been followed at the prior meeting by no change with the caveat that the cyclical peak would almost certainly be higher than the the previous 5-5.25% range and that an increase at today’s meeting seemed more likely than not. Economic data since the June 13-14th meeting had exceeded expectations in many cases. In response, the opening sentence of today’s statement upgrades the characterization of the pace of recent economic activity from “modest” to “moderate.” That’s a hugely significant modification. Since Russia invaded Ukraine, activity in these post-meeting statements had been characterized either as modest, continued to strengthen, or softened. The rest of the statement was the same as before, including characterizations of low unemployment and elevated inflation.
One takeaway from Chairman Powell’s press conference touched on with several of the questions is that officials are not locking themselves into alternating rate hikes and pauses. The federal funds target may or may not be raised again in September depending on a lot of U.S. data to be released in the intervening weeks and other developments such as financial market conditions including movements in the dollar and how food prices react to Russia’s withdrawal from the prior agreement not to imperil Ukraine food shipments, Another interesting takeaway involves the Fed Staff’s forecast, made ahead of FOMC meetings and independent from the SEP projections made quarterly by the Federal Open Market Committee members. The staff no longer projects a U.S. recession next year, as it had been assuming previously in its baseline most-likely scenario.
Another takeaway was Powell’s appropriate reluctance not to be pinned down into quantifying if/then connections between possible economic developments and the Fed’s monetary policy reaction. Numerous questions to him were framed to solicit an if/then reaction function, and Powell’s consistent response was that many variables are monitored, and decisions reflect a totality of the available information each time the group meets. He did say that interest rate hikes will not continue up to the point when inflation has fallen to 2.0% in a manner believed to be sustaining. In fact by that point, he said it is quite probable that the first rate cut of the next cycle is likely to have been done. The incidence of monetary policy is felt with long and variable lags. Policy is currently restrictive and likely to become more so. The task of restoring 2% price stability is still far from being achieved, but important progress toward that goal has been made. Waiting until goal is completed before returning the policy stance to a more neutral setting would assure overshooting the desired goal.
There was a lot of discussion about the labor market, which is still too tight but on the road to softening and in ways that haven’t yet included rising unemployment. That’s consistent with a scenario that avoids recession. Once considered a long shot because of few historical examples of restoring price stability from inflation closer to 10% than 5%, the experience so far of disinflation without rising unemployment supports the possibility that this time might be that rare exception. That said, Fed officials remain very committed to letting data guide policy and not settling for inflation above 2% in order to avoid recession. Much of the unfinished business of completing their mission will involve labor cost developments in non-housing services.
Prior to the press conference, the obvious change I discerned in the statement was the substitution in the opening sentence that recent indicators suggest economic activity has been expanding at a moderate pace rather than a modest pace as in previous FOMC statements. In Fed-speak, moderate implies a faster rate of change than modest. This nuance was not raised in the Q&A portion of the press conference, nor was it stressed n Powell’s introductory remarks. For the most part, he indicated little surprise in how the economy has behaved since the June meeting from what officials were expecting it to do in the short run.
During the press conference, there was little net movement in the dollar, stocks or commodity prices, and the 10-year Treasury yield slid two basis points on net,
Copyright 2023, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: FOMC statement in July 2023, Powell press conference highliights
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