Following the FOMC’s decision to keep rates unchanged on June 14, Leland Abrams of Wynkoop, LLC and a portfolio manager of a fixed income fund at Catalyst, provides his initial reaction, including what investors might expect in the future in his comments below:
The FOMC left the benchmark federal funds rate unchanged this week at 5-5.25%. However, the summary of economic projections (SEP) dot plot indicated two more 25 bp rate hikes this year and higher rates in 2024 and 2025. The FOMC statement was decidedly hawkish as was the press conference. Which aspect holds more weight – the ‘action’ of pausing or ‘jawboning’ the rates market higher for the future?
The Fed was late to react to high frequency data indicating rampant inflation in 2021. Now, it appears the Fed may be late to respond to high frequency data indicating economic slowdown combined with inflation set to fall swiftly (the June +1.2% MoM print from last year rolls off next month and we should see CPI fall to around 3% YoY).
The SEP dot plot has shown terrible predictive power in the past and even Fed Chairman Jay Powell acknowledged they don’t really know where rates will be in the future. Remember, only a year and a half ago, the projection was for the Fed funds rate to be at 50-75bps by now; that’s nearly 500 bps lower than where we currently are.
The day began with a rally in rates across the curve on the heels of a very benign producer price index (PPI) report. MoM PPI final demand came in negative at -0.3% and YoY fell to only 1.1%. The PPI is often regarded as a leading inflation indicator, which points in the right direction warranting less Fed action and hence lower rates.
On the heels of the release of the upgraded SEP dot plot, the rates market sold off swiftly, yet recovered a bit during Powell’s press conference. The positive action was concentrated on the long end with a rally in 7s through 30s, while the front end is slightly lower. The curve is flatter/more inverted on the day with 2s/10s now 90 bps inverted.
So the question is … do we take the Fed at their word or were they just talking? Traditionally, actions speak louder than words…