Liz Looks at: The Fed’s July Statement

Back in the Hike Life

The Federal Open Market Committee resumed rate hikes after a pause in June and raised the target rate by 25 basis points to an upper bound of 5.5%. This now marks the highest fed funds rate in 22 years.

This move was, once again, widely anticipated. As such, the digestion process in the markets has been calm, but it can take 1 to 2 days for investors to fully interpret the news. Jerome Powell made it clear that the Fed remains committed to bringing inflation back down to its 2% target, and left the door open for further hikes at future meetings.

If there is such a thing as a benign Fed meeting, this is about as close as it gets, in my opinion. The vote to hike another 25 bps was unanimous, and the market had priced in more than a 99% chance of this outcome.

I’m having trouble finding anything incredibly enlightening about the July statement. We remain in a wait-and-see pattern as data rolls in, and the Fed will react accordingly.

Slow and Steady Saves Some Face

I had been of the mind that they would be done hiking after the last meeting. Not because the problem is solved, but because I don’t think there is much effect to be had from another 25 basis points. What I underestimated was the market’s continued ability to rally, thus easing financial conditions irrespective of the Fed’s still “live” hiking cycle.

In addition, the consumer has remained willing and able to spend (albeit on credit cards in some cases), and has enjoyed a tailwind from falling inflation and a rising stock market.

Along with the stock market’s effect on consumer confidence, we’ve seen a massive reversal in investor sentiment. More specifically, the amount of AAII survey respondents stating that they’re bullish rather than bearish has increased considerably since the beginning of June. The S&P 500 is up over 9% since then, and the idea of an economic “soft landing” has become more commonplace.

I admit, I’ve even been tempted on a few occasions to flip into optimism mode and believe that we could—if we haven’t already begun to—pull off a soft landing. But I’m stopped by the very real possibility that we haven’t yet seen the effects of this hiking cycle, and perhaps we’ve only seen the very beginning of them.

Not Over Till it’s Over

The Fed is going to get what it wants and we don’t get a vote. As investors, we’ve wondered for a long time what the appropriate level of rates was to solve the inflation problem without inflicting too much pain on the economy. The Fed wonders the same thing. Unfortunately, no one knows the right answer beforehand.

There’s been acknowledgement from the Fed that consumer spending has slowed, bank lending conditions have tightened, and housing and investment has seen some effects from tightening. Powell also discussed policy being at a restrictive level, but noted that it hasn’t been restrictive enough for long enough to have its full desired effects…which I’ll paraphrase into, it’s not over yet.

Even if rate hikes are over, the cycle and the bleedthrough of the tightening cycle isn’t. The result of monetary policy actions like this is typically some softening in labor market conditions. If that rings true this time, we’re still waiting on the data that proves it.

I think the most important result of today’s meeting was that it prevented the stock market from speeding further upward in celebration of declaring the problem solved. I also think there are more effects of these moves that could rear their ugly heads. The Fed said the problem isn’t decidedly solved, which means hikes aren’t decidedly done. And the cycle isn’t over till it’s over.

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