Fed Pauses, Issues Hawkish Statement

FOMC pause, Powell press conference produce volatile session. Swap rates and Treasury yields ended mixed on the day after Chair Powell’s press conference reversed the market’s immediate reaction to the central bank’s “hawkish pause.” The 2-year yield reached a multi-month high (4.80%) after the Fed’s initial announcement but closed at 4.70% after Powell’s comments. Futures are now pricing in a ~62% chance of a 25bp hike at the July FOMC meeting.

Fed pauses, Powell says any rate cuts would be “couple of years out.” In a unanimous vote, the FOMC announced a pause to a streak of 15 consecutive hikes to assess additional information, but signaled they would resume tightening at some point. The policymakers also implied two additional 25bp hikes or a single 50bp hike before year-end. Powell said at the press conference today, “Inflation pressures continue to run high and the process of getting inflation back down to 2% has a long way to go.” Today’s decision may indicate central bankers are counting on slowing demand to ease inflation, but signals of a potential economic slowdown are mixed. According to surveys, consumers were less confident about the economy in May, but consumer spending was elevated in April, the latest reading. The labor market also remains tight, and though inflation has declined, it remains above the Fed’s 2% target. A comparison of today’s Fed statement vs. May’s meeting can be read here.

Day ahead. Retail sales figures, expected to decrease from last month’s levels across the board, will lead the session at 8:30 AM. NY and Philadelphia manufacturing data will also be released at 8:30 AM.