Hopes for a soft landing increase after FOMC meeting and data releases
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The FOMC meeting on Wednesday resulted in an increase in the Fed Funds rate to its highest point since 2001, with the committee arriving at a target range of 5.25%-5.50%. Additional data releases, including PCE, the GDP advanced report, and inflation data from the Employment Cost Index, gave market participants greater hope for the Cinderella story of a “soft landing”.
Fed hikes rates by .25%
The Federal Open Market Committee (FOMC) met this past Wednesday and, in a move consistent with market expectations, voted unanimously to bring the Federal Funds rate to a range of 5.25% to 5.50%. This rate hike is the 11th to take place since March 2022 and brings the Fed funds rate to its highest point in 22 years.
FOMC Chair Jerome Powell reiterated that this increase directly correlated to the committee's review of "the totality" of incoming data and that they are making no promises either way as to the decision to continue rate hikes in upcoming meetings. Chair Powell also mentioned that the bank's staff is no longer forecasting a U.S. recession in 2023 and that, although there is a path for inflation to return to its target rate of 2%, "we have a lot left to go to see that happen" in regards to achieving a soft landing.
Given the expectation surrounding the move by the FOMC, there was barely a reaction in the Financial markets. The main indices ended the day with modest losses as investors were largely prepared for the Fed to raise rates at this past week's meeting. Many economists felt this hike should be the last of the recent rate hikes, with Joe Brusuelas, U.S. chief economist at RSM, saying, "It is time for the Fed to give the economy time to absorb the impact of past rate hikes. With the Fed's latest increase of 25 basis points now in the books, we think that improvement in the underlying pace of inflation, cooler job creation, and modest growth are creating the conditions where the Fed can effectively end its rate hike campaign."
Meanwhile, consumer confidence rose to its highest level in two years, indicating resiliency in the American economy in the continued face of a recession. Employers continue to add jobs, with around 278,000 added monthly this year, unemployment nearing its lowest rate in a half-century, and Q2 GDP growth increased at a rate of 2.4%, an increase over the previous quarter's 2% growth. A look at consumer spending shows Americans continue to spend more, increasing the pace by 1.6% over the last quarter, enough to add a full percentage point to GDP growth. Households showed increased purchases of recreational goods and vehicles, housing and utilities, motor vehicle maintenance and repair services, and financial services like investment advice and insurance, while they cut back spending on automobiles and clothing. With recession fears still in the back of consumers’ minds — the proportion who thinks a downturn is “somewhat” or “very likely” ticked up to 70.6% from 69.9% — these spending habits speak to a consumer mindset focused on preparing for future economic hardships by ensuring their personal belongings and finances are in order.
The Fed's favorite inflation indicator rose at a 4.1% annual pace in June, marking a noticeable reduction from May’s 4.6% annual rate and bringing price growth to its slowest pace in nearly two years. With inflation slowly falling, it’s important to consider the effects on the U.S. dollar and the fluctuations that could occur from these changes. The U.S. dollar showed signs of weakening slightly over the past 12 months and it may be important for companies to consider hedging their FX exposure abroad, as uncertainty over the strengthening of the U.S. dollar remains front of mind.
As Powell refused to confirm or deny future rate hikes, market participants should learn from the rate shocks over the past 18 months. While many economists view this as the last necessary rate hike for the year, the FOMC chair confirmed that this is not the committee's definitive plan.
The upcoming week brings jobs and payroll data to the forefront, with the Initial Jobless Claims report coming out Thursday, and U.S. nonfarm payroll, unemployment rate, and hourly wages data on Friday. While the market response to the FOMC meeting was rather indifferent given the expectation of a 25 bps hike, market participants will continue to weigh the potential impacts of what some economists viewed as an unnecessary step by the Fed.
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