The U.S. Federal Open Market Committee (FOMC) concluded its two-day meeting on the 14th of June 2023. The meeting discussed the Fed’s monetary policy stance and economic projection.
Key pointers to note in this meeting
- Interest rate pause – In this FOMC meeting, the U.S. Federal Reserve (Fed) discussed the uncertain lags with which monetary policy affects the economy, and as potential headwinds from credit tightening, due to the banking spiral that began in Q1 this year, have yet to be felt. Therefore, they have decided to maintain its benchmark interest rate at 5%-5.25%. The committee’s decision to pause rate hikes was in line with market expectations, and it was the first time it had done so since March 2022, when it began a series of 10 consecutive hikes. Committee participants also pointed out that it would be prudent to hold the target range steady in this meeting as it enabled them to gather more information and assess the implications for monetary policy.
- Inflation remained sticky despite moderating – Although data points such as the PCE and CPI index which the Federal Reserve monitors closely have moderated since June last year (June 2022: Total PCE rose by approx. 7% YoY, while Core PCE rose by approx. 5% YoY) as compared to April 2023 when Total PCE was recorded to have risen by 4.4% YoY and Core PCE, that excludes food and energy, rose 4.7% Y.o.Y. For the month of May, the CPI index came in at 4% Y.o.Y, and Core CPI was 5.3% Y.o.Y these data were lower than 4.9% and 5.5% that were recorded back in the April respectively. Thus we are able to expect May’s PCE data to trend down similarly. Nonetheless, inflation pressures still remain well above the 2% range, which the Federal Reserve is committed to achieving, and the projection in the Summary of Economic Projection, or SEP, has jotted for total PCE to reach 3.2%, and Core PCE to be revised up to 3.9% respectively for this year. The labour market still remains very tight although the unemployment rate rose by 3.7% in May from 3.4% back in April, the average payroll job gain over the past three months was averaging around 283K jobs per month. (Payroll job gain in May: +339K beating estimates of +190K)
- Guidance – In terms of guidance, Chairman Jerome Powell mentioned that nearly all committee participants said that some further rate increases would be appropriate this year to bring inflation down to 2% over time. According to the latest SEP that was released, the terminal projected rate has been raised from 5.1% back in March 2023 to 5.6%. This signals that we have not reached the end of the hike cycle and that borrowing costs will most likely be raised by an additional 50bps by the end of this year.
- Federal Reserve Projections – A dot plot graph was released in this meeting, and according to the plotted graph in (Figure 1) a hawkish tone was set. Half of the 18 committee members penciled in that they believe the rate would be around the range of 5.6%, while 3 members indicated the rate to move even higher (including 1 who believes that the rate to be higher than 6%). However, the policymakers anticipate a 100bps rate cut in 2024.
- Market Sentiments are with the bulls – Despite the hawkish tone from the Fed which suggest 2 more additional hikes in the near future. The market still remains bullish and believes that it is unlikely that the terminal rate will be increased further this year, aside from the two additional rate hikes that are expected to occur. This can be seen when all three major indices jumped more than one percent on Friday morning – 16 June 2023. (Dow Jones +1.3% to 34,408.06; S&P500 +1.2% to 4,425.84 and lastly NASDAQ +1.2% to 13,782.82). However, it is to note that if there is a sudden surge in inflationary data, more action may be taken by the Fed.
A Pull Back in Treasury Yields
US yields popped on the hawkish message and this was clearly seen in the US 2-year & US 10-year treasury bond yields, where the yields for the US 2 years got close to 4.80% before closing at 4.66%. While the yields for the US 10 years got close to 3.84% before closing at 3.72%. US treasuries bills are tradable on our POEMS platform. For more information please visit https://www.poems.com.sg/bonds/treasuries/.