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As anticipated, the Federal Open Market Committee (FOMC) voted to raise the federal funds rate by 0.25% to a target range of 5.25%-5.50% at its July meeting. Relative to its June meeting, the statement was essentially unchanged, maintaining the language “In determining the extent of additional policy firming that may be appropriate”, thus leaving the door open for future rate increases. Absent updated economic and interest rate projections, Federal Reserve (Fed) Chairman Jerome Powell’s press conference was of particular focus to gauge any changes in the committee’s thinking around further tightening.
Powell remained balanced in his remarks, acknowledging that recent progress on inflation and labor markets is encouraging, though continued and broad-based evidence of cooling prices and softening wage growth is still needed to confirm the trend. Moreover, he emphasized the importance of the next two months of economic releases, suggesting the July and August CPI reports will play decisive roles in determining whether additional tightening is necessary. Consequently, it is possible the Fed is done tightening despite the median dot projection from June’s meeting which suggests at least one more hike.
The rise in consumer confidence and real wages, stabilization in the housing market and firm second-quarter growth alongside gradually cooling inflation suggest the runway for a soft-landing has widened. However, the Fed’s zealous pursuit of 2% inflation remains a risk to the outlook. Interestingly though, Powell laid out a scenario where policy rates could gradually be reduced next year even if inflation is not at 2%, however, only if strong evidence indicates prices are headed in that direction. While the Fed may need some more convincing over the next two meetings, it seems reasonable to expect this tightening cycle will end this year.
Market reaction suggests that actions taken were in-line with expectations with markets mostly unchanged on Wednesday. Overall, markets have increasingly taken incremental Fed tightening in stride, with U.S. equities up over 20% year-to-date on the back of bullish investor sentiment and improved economic data, despite the potential for additional tightening. While near-term economic risks have abated, investors may be wise to still exercise caution in chasing enthusiasm by emphasizing quality and diversification across equity and fixed income allocations.
Policy rate expectations little changed following July FOMC meeting
Federal funds futures
Source: Bloomberg, J.P. Morgan Asset Management. Data are as of July 27, 2023.