FOMC Recap - 07.26.23

Todays FOMC turned out exactly as expected by us and the markets as evident by the low volatility in both the bond and equity markets throughout the event. Interest rates rose by 25bps once again, we believe this was done to maintain credibility and to show markets that the Fed isn’t afraid of moving rates even higher. The reality is, another 25 or even 75bps don’t make a difference anymore after a rapid 5% hiking cycle, what matters now is the duration of elevated rates. Powell purposefully made it clear that they do not expect inflation to hit 2% until 2025, implying that they will hold rates high for 2 more years. Whether they actually do is up for debate, but it’s clear the Feds goal now is to maintain restrictiveness in their policy but also in their language to prevent markets from front running and potentially driving inflation back higher. Powell has made it clear that policy expectations almost affect markets instantly before the Fed even holds their meetings. This is the main reason why Powell is verbally so firm and always backpedals from giving froward policy guidance. “Inflation is transitory” has made a mock of the Fed over the prior 24 months, and the apparent approach they’re taking is to hold themselves credible to what they’ve foreshadowed in the SEP. Again, we’ve moved on from the level of rates to the next phase of the duration of rates. This definitely won’t be a dull time period with the Fed at its most restrictive stance in over 20 years!