July 27, 2023
Goog morning,
As widely expected, the FOMC raised the target for the fed funds rate by 25 bp to a range of 5.25% to 5.50%, the highest since March 2001. The Fed has raised rates a total of 525 bps since March 2022, making it the fastest hiking cycle ever. The Fed maintained its tightening bias and is keeping its options open with respect to another rate hike to underscore its commitment to fighting inflation. If the data evolves as the market is pricing-in (expects), the Fed will skip raising rates in September. But upside risks to inflation could lead to another rate hike in Q4. The markets, once again, appear to be underpricing the risk of additional hikes.
Late in the Q&A of Chairman Powell’s presser yesterday, while answering a question about when he expects inflation to reach the Fed’s 2% target, he plainly stated, without hesitation – 2025 (a Wow response, and the silence around the room boomed). Stocks do not price-in 2yr inflation expectations, but they may have to price-out any expectation of rate cuts in the foreseeable future. It also means that our rich money-market returns will stay higher for longer than investors have been anticipating.
It is the end of July, the current earnings season is about halfway through, and the next Fed meeting is 8 weeks away. These could be some quiet weeks ahead. Through August, I’m going to shift to writing twice per week; Tuesday and Thursday’s – less on a mid-month holiday. See you next Tuesday, and in the meantime …
Be well,
Mike