Notes from the Desk – Federal Reserve – Reading the Tea Leaves
What they did.
As expected, the Federal Reserve (Fed) raised rates 50bps, bringing the band for the Funds rate to 4.25%-4.5%
What they said.
Surprisingly, the Fed did not put much weight on the recent improvement in CPI as they raised the forecast of the terminal rate to 5.1%, and increased their projection for core inflation in 2023 to 3.5% In addition, the Fed does not see inflation falling to their 2% target until 2025.
During the press conference, Chairman Powell reiterated that rates still need to move higher, however, the pace will depend on the incoming inflation data. Although the inverted yield curve shows that investors expect rate cuts the fall of 2023, Chairman Powell said several times that it would be a mistake for the Fed to lower rates too early. The Fed’s projections do not show rate cuts until 2024.
When asked about what the Fed needs to see in order to cut rates, the Chairman simply stated that the committee needs to see a sustained decline in inflation.
- Despite the rhetoric from Mr. Powell, bond traders continue to anticipate cuts in the fall, leaving yields relatively unchanged.
- We expect rates to experience larger than normal moves when major economic data is released.
- With the Fed poised to take rates above 5%, the impact on the ‘loonie’ and the importing of inflation could push the Bank of Canada to deliver one or two more hikes.