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July 2023 FOMC Brief

FOMC raises rate by another 0.25% to 5.25-5.50%. There are no surprises on this one. And as usual, the statement looks exactly like a copy and paste of what they wrote in the previous month except that this time it suggests that the outlook on the economy seems to have tilted up. Markets movements were mild yesterday.

𝗧𝗵𝗲 𝗣𝗿𝗲𝘀𝘀 𝗖𝗼𝗻𝗳𝗲𝗿𝗲𝗻𝗰𝗲

The Fed's view is that we will not see a recession this year given the resilience exhibited by the economy so far, and it is perhaps possible to get inflation down to its target without putting too many people out of jobs. But their priority is still to get inflation down. So should the situation turns out to be the case where they have to tip things into the deeper end, they will. Because the consequence of letting inflation run out of control again will be worse. And they did not commit themselves to a pause in the hike for the year which is perhaps what many market participants hoped for. However, they do acknowledge the fact that inflation has come down.

𝗧𝗵𝗲𝘆 𝗦𝗲𝗲𝗺𝗲𝗱 𝗔 𝗟𝗶𝘁𝘁𝗹𝗲 𝗟𝗲𝘀𝘀 𝗛𝗮𝘄𝗸𝗶𝘀𝗵

My sense is that overall, they are actually a bit less hawkish. Tough messages are expected, and it is especially important in this delicate situation. If you are hoping not to increase rates further, then at the very least, don't try to rock it by sending the wrong signals, jacking up sentiments, and risk having inflation come back. But it seems they are also coming more to terms that getting inflation down looks possible without a drastic hit to the economy. With rates already this high, inflation already showing positive signs of slowing, and recognizing that it takes time for the impact of these hikes to come through, it makes sense to adopt a wait-and-see approach unless data dictates otherwise.

𝗪𝗵𝗮𝘁'𝘀 𝗰𝗼𝗺𝗶𝗻𝗴 𝘂𝗽 𝗻𝗲𝘅𝘁?

The first GDP preliminary estimate for Q2 will be out on Thursday. Keep a watch on it. Also, the payroll data, FOMC minutes, and Jackson Hole Symposium that follows in August will shed more light.

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