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Powell Puts It in Neutral, What’s Next?

Today’s 75 basis point increase in the Fed Funds rate was expected as it was “telegraphed” in advance by Fed officials. Coming on the heels of June’s 75 basis point increase, the Fed Funds rate is now 2.25-2.50%. This is the Fed’s targeted “neutral” rate that is neither restrictive nor accommodative. Goldilocks is sipping her porridge. The rate is right back to the post Financial Crisis high as set by newly approved Fed Chair Powell in December 2018. The 10-Year Treasury in December 2018 was hovering around 2.75%, just like today.

Where are we and where are we going? Powell insisted we are not in a recession. “Recent indicators of spending and production have softened,” is his preferred terminology. What about the September meeting and the rest of the year? Markets rallied on perceived Fed dovishness going forward. Nasdaq saw its biggest one-day increase since 2020. He remarked that slowing down from the pace of 75 basis point rate hikes will be appropriate “at some point,” and the Fed is now in a “meeting to meeting” phase; and that it “likely will become appropriate to slow the pace of increases while we assess how our cumulative policy adjustments are affecting the economy and inflation.” The year-end target and possible “peak” is estimated at 3.25-3.50% – a full 100 bps into “restrictive” territory. Will that cause a recession? Again, Powell chose his words carefully, “This process is likely to involve a period of below-trend economic growth and some softening in labor market conditions, but such outcomes are likely necessary to restore price stability.” The 10-Year Treasury barely moved, closing at 2.76% as the yield curve flattened out (but is still slightly inverted). One-Month SOFR is 2.32%, Prime Rate is 5.75% as fixed and floating rates diverge. Now, time to watch the data – tomorrow: GDP, Friday: PCE, and employment report next Friday. Stay tuned..

By David R. Pascale, Jr. , Senior Vice President at George Smith Partners