June 14, 2023
Good morning,
It is a Fed day today and ordinarily, since the beginning of this tightening cycle (March 2022), it would be a big deal. Maybe not so much today. At the last FOMC meeting in May, markets interpreted the Fed as following a hope-and pray-policy. Hoping that falling inflation and tighter credit have allowed monetary policy to be sufficiently restrictive and praying nothing else breaks along the way. A little more than a month later, nothing else has broken and markets have fully discounted the Fed leaving rates alone this afternoon. Yesterday’s key inflation data, the CPI (Consumer Price Index) for May, came in precisely as economists had estimated, and assuming markets price in consensus estimates before they are released, yesterday’s “in-line” numbers pave the way for the Fed to pause or skip or do nothing (phraseology has run amok).
Whatever phrase you choose, the Fed still has a tightening bias and the market is expecting one more rate hike next month to take the Fed Funds target range to 5.25% – 5.50%. It is notable that the market has now priced out (removed) all of the easing between now and the end of the year. All year thus far, and as recently as a month ago, Fed funds futures spread had priced in 70 basis points of cuts into year-end. Not anymore.
See you Friday – when we will likely talk about the implications of the signals of an overbought equity market that are starting to flash.
Be well,
Mike