Fed Commentary Firms Last Week's Outlook
Wednesday, June 21st, 2023
Pre-market futures are down again this morning, after a mild down day in the markets yesterday that cooled the bullish fever that gripped market participants last week, following the Fed’s decision to pause on raising interest rates further at last week’s FOMC meeting. We’re light on economic data today and this week overall, at least relative to the past couple weeks, so investors appear to be waiting for new cues before amping up the market rally further.
In his first public appearance since last week’s Fed announcement, Fed Chair Jay Powell is currently testifying before the House Financial Services Committee on Capitol Hill in his twice-yearly address on monetary policy before American legislators. In his comments this morning, Powell said “nearly all” Fed members support raising interest rates “somewhat further,” though, as always, data dependency will remain the Fed’s mantra before any rate decisions.
Thus, last week’s pause is being attributed to the Fed addressing lags in economic data, not putting a cork in rate hikes for this cycle altogether. Powell acknowledged progress having been made to curb inflation but said we still “have a long way to go.” The economy continues to expand at a modest pace, while higher interest rates are slowing overall business investment. Powell also acknowledged that wage growth is showing signs of easing. But his firm line this morning is that the Fed remains serious about keeping more hikes as a possibility going forward.
Currently, three-quarters of analysts surveyed believe the next hike will come at the Fed’s next meeting, in five weeks. (No additional rate hike probability beyond this has been factored in.) This allows for a lot of economic data to hit the tape between now and then, which would give the Fed plenty of time to change its mind. Five weeks from now will also put us deep into Q2 earnings season, where industry performance and future guidance will play a part in how investors — as well as the Fed — view the market.
Later today, hearings for the nominations of Fed Governor Philip Jefferson and nominee Adriana Kugler are scheduled to play out on the Senate floor, and Chicago Fed President Austan Goolsbee will also present his view on the economy and Fed policy looking ahead. Based on Powell’s lead, we expect a fairly strict approach to how Fed members (and hopefuls) discuss our present circumstance regarding inflation and interest rates. As much as their views are rightly valued, we do not expect any notable variation from what Powell noted this morning.
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