By Robert Eisenbeis, Ph.D.
After 10 increases in its target rate for the federal funds, the FOMC paused but indicated that future moves were on the horizon if needed. The Committee also continued to let its portfolio run off at the rate of $60 billion for Treasuries and $35 billion for agency mortgage-backed securities. The decision had been well-telegraphed in advance of the meeting, so the actual decision was no surprise.
The Committee also released a new Summary of Economic Projections (SEP), which showed slow 2023 growth at 1.0%, though somewhat stronger than the 0.4% projected in March. Unemployment was shifted down from 4.5% in March to 4.1% in June, and headline PCE inflation was down 0.1 percentage point to 3.2%, while core PCE moved upward from 3.6 to 3.9%. Finally, the median funds rate by year-end was projected to be at 5.6%, implying two more rate increases by the end of the year. Beyond 2023, growth was projected to be a little weaker in 2024 before hitting 1.8% in 2025, which was equal to its longer-term level. Unemployment remained at 4.5% in 2024 and 2025, while inflation was at 2.1%, basically the FOMC’s target that year as well.
Interestingly, when questioned about inflation during the press conference, Chairman Powell focused on PCE core inflation and what it was doing, suggesting that this was the more important indicator. Of course, we know that the FOMC’s inflation target is headline PCE and not core. So his answers are likely to confuse observers as well as the press, who have often gotten the target wrong. Powell also suggested that housing costs, among the key drivers of inflation now, have had a very important role in the PCE. But we know that the reverse is true, that housing costs are given more weight in the CPI than in the PCE. Housing gets a weight of 15.9% in the PCE and about 18% in core PCE, whereas shelter gets a weight of 32.9%, the largest weight, in the CPI (see here). Of course, there are some technical differences in the definitions which can come into play as well.
Virtually all of the questions raised during the press conference were very focused on policy and on what kinds of information might or might not trigger either an increase in the target rate or a continuation of a pause. Powell largely attempted to respond with details on what indicators the Committee considered, but he declined to point to one or more singular indicators that would be determinative. Instead, he emphasized the broad range of incoming data that would be evaluated. In other words, policy would be data-dependent. To that point, at the beginning and during the discussion, he emphasized the FOMC’s commitment to bringing inflation down to its 2% target but at the same time was cautious about overreacting to a particular number.
It wasn’t clear how much residual tightening to credit might remain as a fallout from the regional bank failures, nor what residual impacts might follow from two years of increasingly restrictive policy. These uncertainties clearly weighed heavily on Powell’s views and the path the FOMC was on. Powell was very clear that he viewed the endpoint of policy as much more critical than the precise path required to get there, which would be data-dependent.
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