The Federal Reserve announced on Wednesday that it has raised its benchmark interest rate to a range of 5.25%-5.5%, marking the highest level in 22 years. This move is aimed at combating the increasing levels of inflation that have been observed.
While the financial markets and economists widely anticipated this decision, the focus shifted towards Fed Chair Jerome Powell’s press conference. Here are the key takeaways from Powell’s one-hour session with reporters:
A Noticeable Slowdown Instead of a Recession
During the press conference, Powell surprised many by stating that the Fed staff is now forecasting a “noticeable slowdown” instead of a recession. He explained that this change in prediction is due to the recent resiliency shown in the economic data.
Furthermore, Powell expressed confidence in the Fed’s ability to bring inflation levels down without causing a significant downturn in the economy.
Putting a Soft Landing Back on the Table
Traditionally, the staff’s economic forecast would only be released on August 16th, alongside a summary of the Fed’s two-day meeting. However, Powell’s remarks indicated that the staff now sees a possibility of achieving a “soft landing.” Gus Faucher, the chief economist of PNC Financial Services Group, mentioned this development and described it as significant.
Credit Conditions and Lending Standards
Following the collapse of Silicon Valley Bank in March, concerns have been raised about other banks tightening lending standards and reducing their lending activities. Although there has been a reduction in lending, Powell reassured that there have not been any dramatic moves so far. The Fed continuously monitors loan standards through quarterly surveys with bank officers.
The latest report is scheduled to be released next week, but Powell provided a sneak preview, stating that lending conditions are becoming tighter. He emphasized that these conditions are within expectations and not cause for alarm.
Experts, such as Subadra Rajappa, the head of U.S. rates strategy at Societe Generale, believe that the tightening lending standards and credit conditions indicate that the Fed is unlikely to further increase interest rates.
According to the Fed’s forecast in June, two more 25-basis-point rate hikes were anticipated for this year.
Powell’s Approach to Rate Hikes
Chief North America Economist at Capital Economics, Paul Ashworth, noted that Powell, the Federal Reserve (Fed) Chair, did not provide any indications about the possibility of a final rate hike in September, despite being given the opportunity to do so. This refusal suggests that Powell is cautious in his approach.
Contrary to the notion of the Fed being on an “every-other-meeting” hiking schedule, with a final hike anticipated in November, Powell pushed back against such a proposition. Former top Fed staffer and Chief Economist at Dreyfus and Mellon, Vince Reinhart, believes that Powell wants to skip a rate hike in September. However, due to certain Fed members’ discomfort with this idea, Powell refrained from publicly stating it.
According to Reinhart, Powell seems more inclined to postpone a policy-rate move until November. Nevertheless, there are others who have reservations about this decision.
Omair Sharif, President of Inflation Insights, observed that Powell never mentioned “one more hike” at all during the meeting. This ambiguity raises the possibility of multiple hikes before the Fed considers its actions complete.
Following the meeting, derivatives market traders only saw a 40% chance of a rate hike by November.
Powell’s Dovish Stance
Despite expressing a cautious approach, Powell did acknowledge that the effects of the Fed’s tightening measures have not yet fully impacted the economy. This implies that Powell is aware of the need to avoid over-tightening.
Thomas Simons, an economist at Jefferies, interprets this as an indication that the Fed will exercise caution to prevent overtightening, given their belief in relatively long policy lags.