The Fed didn’t shock anyone with its unanimous decision to hold rates, but it did surprise markets with its post-meeting statement that rates could rise again, and three officials predicting a 6% peak (possibly two more raises from the present 5.25-5.50% range.) Equity markets fell on the news but soon bounced back, resuming their bullish trend
Bottom line – risk-on.
TODAY’S MAJOR NEWS
Fed puts rate hikes back on the table
Fed officials raised their interest rate forecasts for this year, signaling rates could rise to as high as 5.6%, an additional two additional rate hikes. "[Holding] the target range steady at this meeting allows the committee to assess additional information and its implications for monetary policy,” the Fed commented.
Leaving the door open for future rates hikes, it added that “(the) Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”
The Fed raised rates ten times in meetings up to this May, raising its target range to the highest since 2007, from zero (0%-0.25%) to 5%-5.25%. A further rise to 6%, worst case, would still be modest in the context of previous interest rate cycles, as the chart highlights.
Fed Funds Rate
Economic data suggests inflation easing
Like the CPI data yesterday today’s PPI data shows a lower headline number aided by falling energy prices. The “data” would certainly appear to be showing easing inflation that would justify the market’s expectations of a pivot in policy – and certainly a pause. That won’t always be the case, but for now it is.
Today’s data still shows some stickiness to inflation, but that’s been more the case at the consumer level than at the producer level due to the structure of current inflation, which is largely a lingering problem of wage inflation in the service sector.
Keep in mind that this Fed is paranoid about making the same “mistake” made by its predecessors in 1980 when it pivoted too soon to rate cutting. As such, Fed members have repeatedly stated that they would rather err on the side of too high for too long than to pivot too soon. Inflation for goods is already at the 2% mandated level because consumer sentiment is at historically low levels, reducing buying currently.
Core goods inflation moderating
- The producer price index (PPI) was up 1.1% year-on-year in May, worse than the expected 1.6% decline, but down from a 2.3% rise in April
- PPI fell 0.3% month-on-month in May, more than the 0.1% decline expected, and down from 0.2% gains in April.
- Core PPI told a different story, up 2.8% year-on-year in May, in line with expectations, but down from 3.2% in April
- Core PPI rose 0.2% month-on-month in May, matching the previous month
TODAY’S MAJOR MARKETS
Equity markets
- The S&P 500 and Nasdaq 100 indexes rallied, up 0.1%, and 0.7% on the Fed comments, while the more broadly based Russell 2000 was off 1.2%
- Prior to the Fed news, the Nikkei, DAX and the FTSE 100 indexes had risen 1.5%, 0.7%, and 0.1%, respectively
- The VIX, Wall Street’s fear index, fell 5% to 13.9. Not much fear in this reading
Currencies and Bonds
- The dollar index was slightly weaker this morning, falling 0.4% to 102.6
- Euro and sterling x-rates versus the dollar were both up 0.2%
- Yields on 2- and 10-year Treasuries were also trending lower this morning, but spiked back up to 4.74% and 3.82%
Commodities
- Gold prices were unchanged at $1,959 per ounce
- Crude oil prices fell again in what is becoming a see-saw trading pattern, down 1.2% to $68.7 per barrel
- Grain and oilseed markets were mostly higher on bad weather and gloom over supply
Analysis by Arlan Suderman, Chief Commodities Economist. [email protected].
Market outlook by Paul Walton, Financial Writer. [email protected].
