The Federal Reserve (Fed) left its policy rate unchanged at the target range of 5.00% to 5.25%.  Markets  have expected no change in rates at this meeting for the better part of the last two months.  If there is a surprise in yesterday’s release it is in the Fed’s projection for an additional 0.50% of tightening by the end of 2023.  Market pricing prior to the meeting discounted slightly better than 50/50 odds of one additional 0.25% rate increase in July.

Current Conditions – The Fed described the economy in the same way they did following the March and May meetings.  Growth has moderated from last year in response to higher rates.  The labor market remains very tight despite recent signs of improved balance.  Inflation remains well above the Fed’s goal.  Credit conditions have been tightening.  Banking system conditions have improved since the March meeting, but the impact of credit tightening remains uncertain.

Forward Guidance – The Fed’s statement notes that a pause in hiking should allow the Committee to assess additional information on the effects of the cumulative 5% increase in short-term rates.  Rate projections released in the Fed’s Summary of Economic Projections (SEP) were increased by 0.50% in 2023, 0.38% in 2024 and 0.25% in 2025 when compared to March’s estimates.  The economic assumptions supporting this change in rate projections include faster growth, lower unemployment and higher core inflation than previously expected for the current year.

Policy/Market Reaction – Yesterday’s move was unanimously approved by the Committee.  Quantitative tightening will continue at its previous pace.  The short-end of the U.S. Treasury curve pushed yields higher and flattened the yield curve to reflect the change in Fed rate projections. 

Gary Pzegeo, CFA  joined the firm in 2007 as head of fixed income, focusing on portfolio management, trading, policy formulation and client service.