Thread by @RickRieder

As was widely expected, the @federalreserve today halted the most aggressive policy rate #HikingCycle since 1980, leaving the Fed Funds range unchanged at 5.0% to 5.25%, a level that appears clear to us to be finally having an impact on the #economy.

We think today’s actions represent a “Hawkish skip,” which implies that #policy makers are seeking more #data before potentially hiking rates again in July, or September.

For our part, we think #ChairPowell’s comments at the press conference made it clear that the #FOMC is seeking to balance increasingly restrictive monetary policy with the high degree of uncertainty around the tightening of #CreditConditions…

…and a slowing (but still solid) U.S. #economy, with a moderating (but still sticky) level of #inflation.

In other words, the #tightening effects from the regional #banking stresses are still playing out, and there is high uncertainty around their effects on the economy, while #economic conditions are normalizing on their own.

Therefore, prudent #risk management warrants holding at this time to allow for more information about how #credit conditions are evolving.

And if one word were to describe #Fed policy from here, it is #data. All the data, not just Core PCE (the Fed’s preferred measure), but on all the conditions present and influential on the central bank’s dual-mandate trajectory from here.

Changes to the Fed’s #SEP today made it clear that the #Fed has underestimated the resilience of the economy, the persistence of inflation, and that there are a substantial and increasing number of Committee members who envision the need for higher rates to tame #inflation.

Indeed, the median estimate for the #FedFunds rate at the end of 2023 was raised by 0.50%, to 5.60% and the 2024 and 2025 year-end median projections were also increased modestly.

Also, the fact remains that the #LaborMarket is still very tight. The #unemployment rate is near a record low and the lowest #wage earners are seeing their wages grow the fastest – trends that the Fed should look to preserve even as it seeks to quell inflation.

This economic backdrop leaves the #FOMC in the unenviable position of having to administer a single monetary policy to a resilient real economy that relies on a weaker #financial economy for its funding.

Unlike the media and #market’s desire for simplicity, like one-syllable answers to describe complex #MonetaryPolicy, we think the Fed’s process from here will consider the wide swath of data, which influences the path to normalcy toward its dual mandate targets.

Against that backdrop, interest rate cuts that were being priced in by the #market over the next 6-9 months are looking increasingly improbable, barring an unforeseen catastrophe.

We expect that #Fed policy makers will be deliberate in waiting for #inflation and labor market data that helps them determine whether the momentum of inflation decline continues…

…whether the labor markets begin to weaken materially and observing the changes around the tightening of #credit conditions.