Resume af teksten:
The Federal Reserve has kept the federal funds rate unchanged at 3-1/2 to 3-3/4 percent. Three committee members voted for a 25 basis point rate hike. Markets had partially anticipated a rate hike, as reflected in futures pricing and expectations from certain economists. Following the announcement, the yield curve steepened slightly, with modest changes in 2-year and 10-year yields, and the dollar weakened marginally. The decision comes amid solid economic activity and elevated inflation. Continued inflation or tight labor markets may prompt future rate hikes. Debate exists on whether recent economic data justifies maintaining or adjusting rates. The Fed remains committed to price stability, closely monitoring economic indicators, including inflation and employment data, before the next meeting.
Fra ING:
The Federal Reserve has left monetary policy unchanged, maintaining the target range for the federal funds rate at 3-1/2 to 3-3/4 percent. There were three dissenters, with Beth Hammack (Cleveland Fed), Neel Kashkari (Minneapolis Fed) and Lorrie Logan (Dallas Fed) voting for an immediate 25bp rate hike. Remember they were the three that wanted the Fed to drop its “easing bias” at the April FOMC meeting. Going into today’s meeting, markets were pricing a slightly greater than one-third chance of a 25bp hike, while the Bloomberg survey suggested only 2 out of 104 economists polled expected a hike. The immediate market reaction has been a curve steepening with 2Y yields down modestly and the 10Y yield up fractionally while the dollar has softened a touch. Fed funds futures for September, which had been pricing a cumulative 26bp of rate hikes ahead of the decision, are now pricing 18bp.
As was the case last month, the accompanying statement was much briefer than what was published when Jerome Powell was at the helm, coming in at around half of the 320 words averaged at the last couple of Powell-led meetings. There was nothing new there with the acknowledgement of “solid” activity and “elevated” inflation with a commitment to price stability. In terms of the press conference, Kevin Warsh mentioned that he got the “good family fight” he wanted to see, but in the end, the committee opted for stability by a “large majority.” He acknowledged higher nominal and real bond yields, which could perhaps be interpreted as implying the market may have done some of the work for them. Nonetheless, if inflation doesn’t cool, Fed rate hikes could be part of the solution – “we will not hesitate to act”.
Today’s decision was the closest call for a number of years. The rationale for a hike today can be summarised as the Fed have missed the inflation target for five years and while some progress has been made, elevated oil prices in an environment of a tight jobs market means inflation may stay higher for longer. The median dot plot from the June summary of economic projections had one hike for 2026 and with the market fully discounting a 25bp move before year-end, the question would be, why wait? Moreover, it could be seen as a statement of intent under a new Fed Chair that confirms the Fed’s commitment to price stability and helps to anchor the long end of the Treasury yield curve.
The arguments against, and why we expected a no change outcome, were that having voted to keep rates on hold in June, the data flow since then certainly didn’t strengthen the case for a hike. Consumer confidence is weak, June jobs came in at less than half what was expected with substantial downward revisions to the previous two months, and inflation data was certainly more benign than anticipated with headline prices falling 0.4% month-on-month and core inflation flat on the month. Financial conditions had tightened with the 10Y Treasury yield 15bp higher, the dollar 0.5pp stronger on a trade-weighted basis and the S&P500 1% lower with the NASDAQ down 5.5%. Nine FOMC members may well think a rate hike will be needed this year, but of those nine there is a strong suspicion that five or even six are non-voters this year. Moreover, nine others think they won’t need to raise rates and that is indeed how they voted today.
Markets ahead of today had been fully pricing a September rate hike, but again, there is a significant divergence between the market’s view and economists, who in aggregate expect stable policy to continue. We are in the camp that think the Fed will hold, but it is going to be close. Our thought process is that there are two inflation prints and two job reports between now and the 16 September FOMC meeting. Hiring surveys remain weak and there is scope for an unwind of World Cup hiring. Furthermore, the low unemployment rate has been held down by a sharp drop in the participation rate. This could indicate firms are cutting costs by encouraging early retirement. That said, even in the “prime” 25-54 age group, the participation rate has dropped 0.7pp since January. The jobs market is not as robust as the unemployment rate alone suggests.
Regarding inflation, oil prices have risen, but importantly, gasoline prices did not fall as much as they perhaps should have done when oil was below $70/bbl a couple of weeks ago. In fact, oil prices today of $85/bbl are broadly consistent with the current retail gasoline price of $4.10/gallon. Given the proximity to the mid-term elections, we continue to expect President Trump to push for a deal with Iran that allows a re-opening of the Strait of Hormuz, delivering lower fuel costs for an electorate that is under some financial pressure.
We should also remember that shelter holds the largest weighting within the inflation basket. With house prices barely rising 1% year-on-year and growing evidence from private sector data providers that rents have cooled considerably, this implies that the housing components can contribute to ongoing disinflation. Thirdly, there are the $166bn of IEEPA ‘Liberation Day’ tariff refunds that are providing a significant cash flow boost to corporate America, that should mitigate the threat of higher prices. Then finally, the biggest cost input for corporate America is not tariffs, energy, or semi-conductors. It is instead the cost of workers and wage growth is slowing meaningfully, with Friday’s Employment Cost Index expected to show labour costs rising merely 0.8% quarter-on-quarter.
If we are right, and we do see further evidence of disinflation and cooler jobs data, then we expect to see the market pricing of rate hikes moderate. That could culminate in the Fed leaving the policy rate unchanged for a prolonged period rather than hiking once and then cutting again in 2027 as they are currently projecting within their summary of economic projections.
The FX market, perhaps more than any other class, had been shifting towards a hike today and keeping the dollar broadly bid. The decision itself has seen the dollar a little weaker, largely in line with what had been priced into the FX options market, and the dollar sold off a little more in the press conference. Today’s events will be a disappointment for those who felt Kevin Warsh could have flexed his hawkish muscles and left the FX market back to trading US data and what volatile oil prices mean for monetary policy.
In fixed income, we have seen some bullish steepening of the curve, 8bp off the short-end and only 2bp off the long end – especially as some were expecting a hike today to support the long-end. Break-even inflation rates from the 5Y5Y inflation swap have understandably nudged 4bp higher, and gold and silver have seen 2-3% rallies on the view that the Fed may not, after all, back up its inflation-fighting rhetoric with action. And perhaps worryingly for the Fed, the 30-year Treasury yield has risen 7-8bp.
For FX, the reaction at the long-end of the bond market is partially reversing the narrative of a tough Fed assuaging concerns about the dollar de-basement trade. EUR/USD probably needs to trade more in a 1.14-15 range now, but a more sustainable rebound requires a sustained period of lower oil prices and US jobs and price data convincing the markets and the Fed that a September rate hike is no longer required. This is especially so given Warsh’s strong pitch today that the message from the markets is become more direct – and the current message is that the Fed will hike in September.
Overall, today’s press conference can add to the sneaking suspicion that the Fed will talk tough but won’t hike and the market conviction over a September rate hike may well come under pressure.
Kilde: ING, https://think.ing.com/articles/fed-holds-rates-steady-as-three-fomc-members-dissent/
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