The Fed announcement is being summarized as a “hawkish pause”. As a result, both stocks and bonds have taken a bit of a hit. By no means was it an extreme market event, but it definitely came out slightly more aggressive than the markets had hoped. So, what is a hawkish pause? Below are some updates on the topics I presented earlier that help outline that.
Inflation
- The fed walked a fine line here by touting their rate hikes, the small victories up to this point on inflation starting to pull back, while simultaneously raising their core inflation expectations for 2023. AKA, they are slightly more pessimistic about their timeline for beating inflation, while still confident that the job will eventually get done
- At one point Powell said rate cuts could take “years”, which while very open-ended, continues to reinforce that the market should tread with caution on any rate cut assumptions happening sooner than later.
The rate hike
- As expected the Fed did not hike rates today. No surprises here.
The Dot Plot
- This is where the real fireworks took place. The updated projections from the Fed imply that there are now TWO rate hikes expected to take place this year. With a few Fed members actually leaning towards three.
- While the market initially sold off pretty hard, Fed Chair Powell minimized some of those losses by stating that future rate hike decisions were still “live”. In other words, they have not already decided to hike rates in July. Sure it is their expectation, but they will assess the merits of that rate hike when the July meeting comes around
- (it’s like that little sliver of hope the market holds on to that perhaps economic data between now and then changes the Fed’s mind. Unlikely, but you never know…..)
Employment (and Economy overall)
- The Fed gave some muted encouragement that it was seeing unemployment move in the right direction (going higher), while overall stating their objectives remained the same. They very much stated that future employment data would be key to future rate hike decisions, further reinforcing their wage inflation concerns within the overall inflation battle. In other words, they think the economy can still withstand more rate hikes because overall employment is still very strong.
I would not say that the overall expectations on the direction of rates have materially changed. One rate hike, two rate hikes, whatever it ends up being it is still assumed that we are almost finished with the hike phase of the overall “hike, pause, cut” journey that is in front of us in the coming years. While this does suggest rates might take longer to drive downward, it will likely take several more months of data for our industry to understand where that final hike (and the inevitable rate cut conversation) shakes out.
( Disclaimer: This is not direct advice or financial advice for clients, just an opinion.)
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