Fed flags further rate rises, but shifts to data-dependent mode

The FOMC raised the target range for the fed funds rate by 75bp today, in line with our and consensus expectations. In addition, and as we flagged in our preview note, the Committee changed its communication strategy by refraining to provide clear guidance on the size of upcoming rate rises – although it made clear that the bias is still very much for more tightening, with Chair Powell stating that ‘unusually large’ steps such as today’s could yet happen again. However, with the target range now very close to the estimated neutral level, at 2.25-2.5%, the Fed is now in a much more comfortable place with its policy stance, with less of a need therefore to pre-commit to large tightening steps. In addition, while risks to the inflation outlook remain significant, some modest softening in demand is now reducing those upside risks somewhat. Chair Powell hinted nonetheless that the destination for rates flagged in the June projections – i.e. for the fed funds rate to peak around our own forecast of 3.75-4.00% – was still consistent with current Committee thinking, and he reaffirmed that achieving price stability is the overarching goal of the Fed, despite the risks of recession. 

Indeed, Powell was continually questioned in the press conference on whether the US might already be in a recession, and on whether the Committee expects one. He said that he judged it unlikely the US is currently in a recession given the strength in labour market and other indicators, consistent with our own view, and although Q2 GDP may well suggest the US is in a technical recession, GDP is prone to substantial revisions following the initial estimate. He also said the Committee continues to see a narrow path to a soft landing for the economy, while admitting that the path appears to have narrowed. As such, while the destination for rates remains unchanged for the time being, the more uncertain macro environment combined with the fact that rates will soon be in restrictive territory means that ‘at some point it will be appropriate to slow down’ rate hikes. 

All told, the outcome of the meeting and the forward guidance shift from the FOMC was in line with our expectations, with no real surprises. We continue to expect the Fed to follow up today’s 75bp rate rise with 50bp moves at the September and November meetings, downshifting to 25bp moves in December and February, with the upper bound of the fed funds rate ultimately peaking at 4%. See our note here for more.