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Fed Chair Powell goes forward with 75 basis-point rate hike, signals slowing of rates in the future

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Yahoo Finance's Brian Cheung joins the Live show to detail Fed Chair Jerome Powell's statements on the latest FOMC meeting and the outlook on future interest rate hikes.

Video Transcript

- Let's check in with Yahoo Finance's, Brian Cheung, who was just in the room moments ago with Powell. Brian, what stuck out to you from the conference?

BRIAN CHEUNG: Yeah. Well a bit of a roller coaster of a conference that wrapped up just now. But the key takeaway is essentially that the Federal Reserve doesn't have any sort of forward guidance on what its next steps might be. Keep in mind, there are three more meetings through the end of this year. And the last few meetings we got some guidance that, well, it might be 50. It might be 75. It's probably going to be this. It's probably going to be that. Not the case for the next meeting at the end of September in about eight weeks.

Now what also caught our attention, and probably the attention of a lot of Americans as well, was the Fed Chairman's commentary on him not thinking that the US is in a recession right now. He was saying there were just too many areas in the economy that are performing well. Pointing to the labor market where the unemployment rate is at 3.6%. But one important thing is that as we talk about what's going to happen next, could the Fed trigger its own recession if it tightens too fast?

Well, one place where you can look for that answer is in financial markets. When you take a look at the 10 year, they were getting the message that the Fed was going to raise interest rates. So they raised kind of their expectations rising to almost 3.5% as of the last meeting in June. But those conditions have come back down. You see the 10 year around 275 right now. You also see the 30 year mortgage going sideways. So what does that tell the Fed about how they are reading the reaction? Take a listen to what Fed Chairman, Jay Powell, said when I asked him that exact question.

JAY POWELL: A big piece of that is inflation expectations. You know, breakevens coming down, which is a good thing. It's a good thing that markets do seem to have confidence in the committee's commitment to getting inflation back down to 2%. So we'd like to see market based readings of inflation expectations come down. Broader financial conditions have tightened a good bit. I mean, the way this works is we set our policy, and financial conditions react. And then financial conditions are what affects the economy. And we don't control that second step. We're just going to do what we think needs to be done.

We're going to get our policy rate to a level where we're confident that inflation will be moving back down to 2%. Confident. So that's how we're going to take it. And of course, we'll be watching financial conditions to see that they are appropriately tight, and that they're having the effect that we would hope they're having, which is to see demand moderate and inflationary pressures recede. And ultimately inflation come down.

BRIAN CHEUNG: So obviously, when it comes to the conditions that the Federal Reserve faces right now, he's really not saying that he's concerned about anything right now. At least when it comes to those conditions coming back down even though 30 year mortgage rates haven't continued to rise further, which could be more helpful to pressing some of the hot demand in the housing market. The Fed chairman saying he's comfortable with where financial markets are right now. So a wide ranging commentary from the Federal Reserve as they again did another 75 basis points this afternoon.

- An honest assessment that the inflation print was, quote, "worse than we expected." But Brian, what do you make of the markets bouncing on the obvious statement, the expected statement, that at some point it will be appropriate to slow down. Everyone expected that. Why did the markets bounce so significantly in your estimation?

BRIAN CHEUNG: Yeah. Well, I mean, this is because maybe the Federal Reserve was a bit more dovish than the markets had been expecting prior to 2:30 PM. Now when it comes to of course reading market reactions, it's a bit of a fool's errand to attribute any reaction to one single reading of what happened. But essentially, we have to remember here that the Federal Reserve also cautioned the other side of things. They could get even more aggressive if they wanted to.

Earlier in the press conference, Fed Chairman, Jay Powell, saying that they could deliver another unusually large rate hike kind of essentially reminding the markets, hey, we don't usually do this type of thing. But that leaves on the table certainly the case for something larger than 75 basis points. Now whether or not they get more aggressive on the rate hikes, or at some point they start cutting rates, it's all about the data. Again, that underscores how important it is that the Fed essentially saying forward guidance, it's not a thing anymore. So RIP forward guidance. Born earlier this year. Dead officially now.

Goodness. Well, thank you for keeping us up to speed on all the goings on at the Fed there today. Brian Cheung, thank you so much.