Federal Reserve Raise Rates as Expected, Changed Modest Pace of Growth to Moderate

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    Fed Governor Waller said that he does not support altering monetary policy due to concerns about mismanagement of some banks.

    US economy is still ‘ripping along’
    Right now everything ‘seems to be calm’ in the banking system
    Global spillovers from expected from coordinated central bank tightening have to really materialized
    It’s still not clear that recent bank failures have had a material effect on credit conditions
    Monetary policy should not be altered due to ‘ineffectual management at a few banks’
    It’s the Fed’s job to use monetary policy to fight inflation; the job of bank leaders is to manager interest rate risk
    It’s disturbing that core inflation isn’t moving, will probably require more tightening
    Core inflation is not coming down ‘like I thought it would’
    So far it looks like the idea of labor market softening without much rise in unemployment is ‘holding up’


    Richmond Fed Barkin: (Non Voter)

    Comfortable doing more on interest rates if demand does not slow
    Is “comfortable doing more” on interest rates if the coming data doesn’t confirm a story that slowing demand is returning inflation to the 2% target.
    Believes higher rates may create the risk of a more significant slowdown, but the experience of the 70s shows the Fed should not back off its inflation fight too soon.
    The 2% target has served the Fed well for a generation.
    Inflation has proved “stubbornly persistent,” and he is still looking to be convinced that weakening demand will control it.


    Powell’s prepared text released and notes that FOMC participants expect further rate hikes by year-end

    Process of getting inflation back to 2% “has a long way to go”
    Nearly all FOMC participants expect it will be appropriate to raise rates somewhat further by year end
    Seeing some effects of tightening but it will take time to see full effects
    Labor market remains very tight but nominal wage growth showing signs of easing, job vacancies have declined
    Longer-term inflation expectations appear to remain well anchored
    Tighter credit likely to weight on economic activity but extent remains uncertain
    We will continue to make our decisions meeting by meeting
    Reducing inflation is likely to require a period of below-trend growth


    The US dollar touch higher on these comments but there’s no big departure from what he said in the press conference.

    The implied probability of a July 26 Fed hike is at 74% up from 69% yesterday.



    June 21, 2023

    Semiannual Monetary Policy Report to the Congress
    Chair Jerome H. Powell

    Before the Committee on Financial Services, U.S. House of Representatives

    Chairman McHenry, Ranking Member Waters, and other members of the Committee, I appreciate the opportunity to present the Federal Reserve’s semiannual Monetary Policy Report.

    We at the Fed remain squarely focused on our dual mandate to promote maximum employment and stable prices for the American people. My colleagues and I understand the hardship that high inflation is causing, and we remain strongly committed to bringing inflation back down to our 2 percent goal. Price stability is the responsibility of the Federal Reserve, and without it, the economy does not work for anyone. In particular, without price stability, we will not achieve a sustained period of strong labor market conditions that benefit all.

    I will review the current economic situation before turning to monetary policy.

    Current Economic Situation and Outlook
    The U.S. economy slowed significantly last year, and recent indicators suggest that economic activity has continued to expand at a modest pace. Although growth in consumer spending has picked up this year, activity in the housing sector remains weak, largely reflecting higher mortgage rates. Higher interest rates and slower output growth also appear to be weighing on business fixed investment.

    The labor market remains very tight. Over the first five months of the year, job gains averaged a robust 314,000 jobs per month. The unemployment rate moved up but remained low in May, at 3.7 percent. There are some signs that supply and demand in the labor market are coming into better balance. The labor force participation rate has moved up in recent months, particularly for individuals aged 25 to 54. Nominal wage growth has shown some signs of easing, and job vacancies have declined so far this year. While the jobs-to-workers gap has narrowed, labor demand still substantially exceeds the supply of available workers.1

    Inflation remains well above our longer-run goal of 2 percent. Over the 12 months ending in April, total personal consumption expenditures (PCE) prices rose 4.4 percent; excluding the volatile food and energy categories, core PCE prices rose 4.7 percent. In May, the 12-month change in the consumer price index (CPI) came in at 4.0 percent, and the change in the core CPI was 5.3 percent. Inflation has moderated somewhat since the middle of last year. Nonetheless, inflation pressures continue to run high, and the process of getting inflation back down to 2 percent has a long way to go. Despite elevated inflation, longer-term inflation expectations appear to remain well anchored, as reflected in a broad range of surveys of households, businesses, and forecasters, as well as measures from financial markets.

    Monetary Policy
    With inflation remaining well above our longer-run goal of 2 percent and with labor market conditions remaining tight, the Federal Open Market Committee (FOMC) has significantly tightened the stance of monetary policy. We have raised our policy interest rate by 5 percentage points since early last year and have continued to reduce our securities holdings at a brisk pace.2 We have been seeing the effects of our policy tightening on demand in the most interest rate–sensitive sectors of the economy. It will take time, however, for the full effects of monetary restraint to be realized, especially on inflation.

    The economy is facing headwinds from tighter credit conditions for households and businesses, which are likely to weigh on economic activity, hiring, and inflation.3 The extent of these effects remains uncertain.

    In light of how far we have come in tightening policy, the uncertain lags with which monetary policy affects the economy, and potential headwinds from credit tightening, the FOMC decided last week to maintain the target range for the federal funds rate at 5 to 5-1/4 percent and to continue the process of significantly reducing our securities holdings. Nearly all FOMC participants expect that it will be appropriate to raise interest rates somewhat further by the end of the year. But at last week’s meeting, considering how far and how fast we have moved, we judged it prudent to hold the target range steady to allow the Committee to assess additional information and its implications for monetary policy. In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, we will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. We will continue to make our decisions meeting by meeting, based on the totality of incoming data and their implications for the outlook for economic activity and inflation, as well as the balance of risks.

    We remain committed to bringing inflation back down to our 2 percent goal and to keeping longer-term inflation expectations well anchored. Reducing inflation is likely to require a period of below-trend growth and some softening of labor market conditions. Restoring price stability is essential to set the stage for achieving maximum employment and stable prices over the longer run.

    Before concluding, let me briefly address the condition of the banking sector. The U.S. banking system is sound and resilient. As detailed in the box on financial stability in the June Monetary Policy Report, the Federal Reserve, together with the Treasury Department and the Federal Deposit Insurance Corporation, took decisive action in March to protect the U.S. economy and to strengthen public confidence in our banking system. The recent bank failures, including the failure of Silicon Valley Bank, and the resulting banking stress have highlighted the importance of ensuring we have the appropriate rules and supervisory practices for banks of this size. We are committed to addressing these vulnerabilities to make for a stronger and more resilient banking system.

    We understand that our actions affect communities, families, and businesses across the country. Everything we do is in service to our public mission. We at the Fed will do everything we can to achieve our maximum-employment and price-stability goals.

    Thank you. I am happy to take your questions.

    1. A box in our latest Monetary Policy Report, “Developments in Employment and Earnings across Demographic Groups,” discusses differences in labor market outcomes among segments of the population. Return to text

    2. A box in our latest Monetary Policy Report, “Developments in the Federal Reserve’s Balance Sheet and Money Markets,” discusses changes in the size of the Federal Reserve’s balance sheet. Return to text

    3. For a discussion of bank credit availability, see the box “Recent Developments in Bank Lending Conditions” in the latest Monetary Policy Report.



    FOMC minutes highlights:

    Those favoring hike noted tight labor market, stronger economic momentum and little evidence of inflation on path to 2%
    Fed staff saw mild recession likely to start later this year
    Almost all participants jusuged it appropriate or acceptable to leave rates unchanged
    A few participants noted potential for upward pressure on money market rates as Treasury increased bill issuance
    Almost all participants stated that upside risks to inflation might become unanchored

    Helmholtz Watson

    The Federal Reserve raised rates 25bps to a target range of 5.25-5.50% in unanimous vote at their July meeting as expected. According to the CME FedWa
    [See the full post at: Federal Reserve Raise Rates as Expected, Changed Modest Pace of Growth to Moderate]

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