Fed Skips, Now What?


Kevin Gale, Managing Director, Head of Fixed Income

As expected, the Federal Reserve left interest rates unchanged after their June meeting. Given Fed Chair Jerome Powell’s comments about further rate increases and the dot plot expectations moving even higher, it makes little sense to me why the Fed did not raise rates today. In my opinion, it could open up the Fed for a possible 50 basis point hike in July, if economic data comes in hotter than expected between now and their July 26th meeting.

One comment from Powell that really made me scratch my head was his response to possible rate cuts in the near future. Powell stated that we are “talking about a couple of years out,” from rate cuts. If we are that far from rate cuts, why not raise again now? In addition, with the strength of the equity markets we have seen, why didn’t the Fed take advantage and raise 25 basis points now to get that out of the way?

Powell commented that nearly all officials expect some further hikes ahead. The new dot plot shows rates moving to an average of 5.6%, which implies at least two more rate hikes. The previous dot plot showed rates peaking at 5.1%.

Powell remains steadfast on getting inflation down to the Fed’s 2% target. In the post meeting conference, he stated that “inflation pressures continue to run high and the process of getting inflation back down to 2% has a long way to go,” implying further hikes are imminent.

I would expect any Fed speak between now and the next meeting to be hawkish, causing volatility in the treasury market. On top of the hawkish Fed, the Treasury Department is expected to issue around $1 trillion of T-bills over the next several months to replenish their coffers now that the debt ceiling debate is behind us (at least for now).

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