Topline
The Federal Reserve said Wednesday it will likely bump interest rates yet again this year, confirming its June pause was not the end of the central bank’s tightening campaign as some on Wall Street hoped.
Key Facts
Officials assigned a 60% probability to bumping the federal funds rate again in 2023, according to newly released notes from the Federal Open Market Committee’s meeting last month, at which officials held interest rates steady.
“Almost all” FOMX members agreed to keep the federal funds rate at its previous level.
Fed policy makers agree it’s “quite likely” the U.S. will enter a recession this year though such a downturn stemming from the rate hikes will be “neither deep nor prolonged.”
Some of the more bearish FOMC members deemed there were “few clear signs that inflation was on a path to return” to the Fed’s 2% long-term goal.
Stocks ticked downwards following the Fed release, holding earlier losses; the Dow Jones Industrial Average, S&P 500 and tech-heavy Nasdaq are each down Wednesday.
Big Number
5% to 5.25%. That’s what the target federal funds rate sits at now, its highest level since September 2007.
Key Background
The Fed’s June meeting was its first since last January that it declined to raise interest rates. Its tightening campaign has helped bring annual inflation down from 9.1% in June 2022 to 4% in May, slowing down the economy in the process as higher borrowing costs cooled everything from corporate profits to home prices and led to three high-profile bank failures. Hopes that the Fed would begin loosening monetary policy after its June meeting were quickly dashed after chair Jerome Powell said most officials believed further rate hikes are on the horizon. The S&P is down 7% since the beginning of last year, even after its 16% rally year to date.
What To Watch For
The FOMC’s next meeting will conclude on July 26. Futures contracts price a roughly 90% chance the Fed will again raise rates by 25 basis points, according to the CME FedWatch tool. Stocks typically slump during Fed tightening cycles before roaring back once the central bank takes its foot off the pedal.
Surprising Fact
Yields on 1-year and 3-year U.S. Treasury notes have surged more than 100 basis points apiece to their highest levels in more than a decade as bond markets price in expectations for a lengthy period of elevated interest rates.
Chief Critic
Extended periods of aggressive monetary policy “can create more volatility than the economy would exhibit on its own, due to our economy’s ability to adjust relative to extreme conditions,” BlackRock’s top fixed income strategist Rick Rieder wrote Wednesday. “More damage is done by monetary policy excesses, than a mere sense of patience would achieve as the system organically adjusts,” Rieder continued.
Here’s How Stocks Performed After The Fed Stopped Hiking Rates In The Past (Forbes)
Fed Pauses Interest Rate Hikes For First Time In Over A Year—But Signals More May Still Come (Forbes)
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