Boring FOMC Meetings to Come
Market Driver: Monetary Policy
The table below shows current Fed Funds, pricing in a 25bps hike at the July FOMC meeting and holding the rate steady until around Q1 2024.
The table below shows the June SEP projections of around two more hikes for 2023 before cutting rates to 4.6 in 2024 and then 3.4 in 2025.
Source: https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20230614.pdf
Given the cool June CPI, I think Chair Powell has substantial justification to pause rate hikes this coming FOMC, albeit with data dependent rhetoric in case inflation inflects upwards again and requires additional tightening. It is worth emphasizing that what matters to the real economy is the long end of the yield curve, with the 10yr once again dropping below 4.0%. Over the past 6 months, there has been a weird paradox of forward pricing. Every time the bond market prices recession, it stimulates the real economy with lower yields and holds off the recession.
As of this writing, it’s been the longest duration that 2023 cuts have been priced out with the recent NFP readings and finally resembles a “higher for longer” narrative that Chair Powell has been pushing since his Jackson Hole speech last August. However, cuts have once again been pulled forward with the July 0.2 Month over Month (MoM) print. For Chair Powell to feel comfortable, he most likely needs a string (~6) <0.3 MoM prints which is ~3.3-3.7% annualized.
Base effects end after this print, and the MoM number is the only one that matters going forward. At the moment, Chair Powell is likely to pause rate hikes and observe whether shelter continues its downtrend and offset any commodity price impulses. There is a risk that core CPI inflects upwards around Thanksgiving.