Board of Governors of the Federal Reserve System – Jerome Powell

FMOC Raises Rates by 0.25

The Federal Reserve Chair Jerome Powell lifted interest rates by 0.25 moving the federal funds rate to 5.5% from 5.25%.  This was widely anticipated by the market thus no surprise.  In general, this meeting was a non-event since the FED also made minimal changes to the post meeting statement, thus nothing new about policy plans in the future.

Our expectations are for one more hike this year in September and potentially a couple of more hikes next year.  Although, inflation slowed down to about 3%, it is probably higher due to volatile components like food thus statistically it could really be higher.  What is clear is the pace of rate hikes is going to slow down after reaching a 22-year high.   This can be seen by the statement from Powell, ‘We can afford to be a little patient.’  In other words, uncertainty is still high and they need more data and time to make a decision.  There are still two more inflation and employment reports till the September FED decision.

Effect of Rate Hikes – Still Impacting Economy

Thanks to the time lags of monetary policy transmission the FED needs to be cautious at this point.  There are two risks that deserve our attention in particular.  First, the real estate market and in particular the commercial real estate market is facing potentially a big hit.  Second, although credit has become more expensive with higher rates a more important indicator is credit availability.  Companies may still want to borrow but credit liquidity issues means that credit might not be available, thus expect weaker and less capitalized companies to face more problems with some going out of business.

Since the FED is trying to engineer a ‘soft’ landing at this point, we would expect it to be cautious at this point.  There no surprize at the upbeat view with caution.

Inflation Risk Still Present – No Decision Made yet on Pace of Future Rate Increases

This means stay neutral regarding your investments since the inflation point has not yet occurred.  Transmission of monetary policy and credit data are important factors at this stage.  Thus, more emphasis on the data in the next few months to see if the FED can justify and signal a slow down and reverse of interest rates.