The Fed Strikes Back: Emperor Powell Successfully Hikes Rates to 22-Year High

Return of the hike. Today’s 25bp rate hike may have been a bit boring with the move effectively locked in by markets long beforehand, but all eyes were on Powell’s press conference, and he delivered. The Fed Chair kept the door open for future hikes, adding that the Fed would be data dependent when evaluating their next steps. He also downplayed the notion that the Fed already decided to hike at every other meeting, fueling bets for a “skip” in September. Powell relayed an optimistic view on U.S. economic outlook, suggesting that the Fed no longer has a recession in their projections for an economy that is currently expanding at “moderate pace.”
 
The Fed’s language shift in their economic outlook wasn’t shocking given upside surprises from economic data since the June meeting. The U.S. economy is strong, labor is tight, and consumers are optimistic. Indeed, tomorrow’s GDP data is expected to show strong U.S. growth, and the Congressional Budget Office forecasts continued GDP growth into 2025 despite some reduction in consumer spending. Though recession odds appear low, the risk of stagflation may re-emerge in coming months, according to HSBC economist Max Kettner, who said today that he is concerned US inflation may reaccelerate at year-end.
 
A comparison of today’s Fed statement vs. June’s meeting can be seen here.

Fed keeps options open. Today’s unanimous quarter point move saw the target range rise to 5.25% to 5.5%, the highest level in 22 years. Swap rates and Treasury yields dropped following Powell’s press conference, the policy-sensitive 2-year UST yield falling 3bps to 4.84% after reaching a high of 4.92% in the early afternoon. The market-implied probability of an additional 2023 hike was effectively unchanged, however, currently sitting at ~42%.