Yahoo Finance Fed decision: Economists react to rate hike that didn't 'rock the boat'
The Federal Reserve raised the target range for its benchmark interest rate by 0.25% on Wednesday and didn't commit to being done hiking rates this year.
Wednesday's move pushed interest rates to a new range of 5.25%-5.50%, the highest level since March 2001. With the hike largely priced in, investor focus shifted to what Chair Jerome Powell said about the state of the economy and the future path for rate hikes.
"The process of getting inflation back down to 2% has a long way to go," Powell said in a press conference Wednesday. Powell added that bringing down inflation "is likely to require a period of below-trend growth and some softening of labor market conditions."
With a largely priced-in event and few surprising comments from Powell, economists saw Wednesday's decision as the Fed delivering a "neutral meeting."
Ellen Zentner, chief US economist, Morgan Stanley
“No need to rock the boat at this summer meeting when market pricing is daily in line this year with the Fed's dot plot … Consistent with our economic outlook, we continue to look for the Fed to hold the peak rate at 5.375% for an extended period before making the first 25bp cut in March 2024.”
Rick Rieder, chief investment officer of global fixed income, BlackRock
"While the cooler June CPI report was a welcome development, it is clear that the Fed does not think one data point makes a trend yet, and with some on the Committee believing that the risks to the inflation outlook remain to the upside, they want to reach the sufficiently restrictive stance of policy and hold there until they see evidence of inflation coming down closer to 2%."
Veronica Clark, economist, Citi
"Chair Powell seemed intent on delivering a neutral meeting and for the most part succeeded. The well-expected 25bp rate hike was delivered. The September meeting was left 'live' for a rate hike, but Powell gave the impression the next hike would more likely come later this year, if at all, similar to market pricing. Chair Powell confirmed that in a 'soft landing,' balance sheet reduction might continue even as the Fed cuts rates. Our base case includes a final 25bp hike in November. Upside risk to core inflation later this year and into 2024 raises the risk that Fed officials either raise policy rates further or keep them higher for longer than markets anticipate."
Michael Gapen, US economist, Bank of America
"In a minor surprise to us, the Fed adjusted its description of growth in economic activity, saying that the economy 'has been expanding at a moderate pace,' which we interpret as stronger than the 'modest pace' description used in June. We think that this upgrade reflects the upward revisions to 1Q data."
Sonia Meskin, head of US Macro, BNY Mellon Investment Management
“It is a good compromise between the hawks and the doves. You did see after the June pause them come out and say, look, the job is not yet done. This is a good compromise between the two. It would be good to strike a dovish tone after they changed to a more hawkish direction, too. And finally, we all know that even though the headline and goods inflation are coming down, it's really now about the services, and services pricing is much more closely correlated to wage growth than goods or headline inflation.”
Dennis Lockhart, former president, Federal Reserve Bank of Atlanta
“I think using the term ‘last mile’ is a good device because it's going to be, in my opinion, much more difficult to get from an inflation rate of 3% to an inflation rate of 2% on core measures, measures that are not just headline and not reflecting volatility from month to month. And that could take a while, and, therefore, I think that observers should be patient because I don't think the objective is going to be achieved any time in the near term. It is probably a 2024 development and may be even later than that. So I'm in the hold for the longer camp.”
Jay Bryson, chief economist, Wells Fargo
"Our base case remains that today's rate hike will be the FOMC's last of this tightening cycle. For much of this tightening cycle, the FOMC has been playing catch-up amid sky-high inflation and a federal funds rate that was at the zero lower bound just 16 months ago. Today, with the fed funds rate comfortably north of 5%, the Fed's balance sheet steadily shrinking and core inflation trending down (Figure 4), the case for additional tightening is more tenuous. That said, we would not be shocked if the FOMC squeezed in one more rate hike between now and the end of the year."
Thomas Simons, US economist, Jefferies
“To the extent that the Fed views policy lags as relatively long, it suggests that they are going to be very careful in trying to avoid overtightening from here. Governor Waller and Dallas Fed President Logan made comments in the weeks before the blackout period indicating that they do not expect much more of an impact to come through to the economy from previous hikes, so this guidance from Powell provides a modest amount of dovish comfort.”
“Apart from that, the most interesting elements of the press conference were the first known mentions of Barbie and Taylor Swift at a Fed press conference, and one reporter's admiration of Powell's dapper purple tie. Without the benefit of clairvoyance, Powell provided as much guidance as he could.”
“As of late afternoon Wednesday, market pricing for another hike by November remains close to unchanged from where it was before the meeting at about 40%. We suspect Powell is probably pretty happy about that.”
Josh Schafer is a reporter for Yahoo Finance.
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