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Daily Spotlight: Fed Gets Back to Work


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AllMarket Outlook

Argus•July 27, 2023

Market Outlook

Neutral – Short term


The Federal Reserve wrapped up its latest Open Market Committee meeting on Wednesday and, as expected, again raised its current fed funds target rate by 25 basis points, to 5.25%-5.50%. This followed a pause last month and now makes it 11 increases by the central bank over 16 months. All 12 governors were in agreement for the decision, even though inflation has moderated over the past year (the latest core CPI reading was 4.8%, down from 9.1% a year ago, and the latest core PCE Price Index reading was 4.6% — both still well above the Fed’s target of 2.0%). The decision was widely expected, but now the drama will build for the next meeting. Will the Fed hike again or will it move to the sidelines (having finally moved ahead of the inflation curve) and assess the new economic and pricing data as it comes in? According to the latest fed funds “dot plot” forecasts by the governors, the central bank’s target for the rate at year-end is 5.63%. That’s one more hike — but we are not so sure that’s a good idea. Our forecast calls for the Fed to keep its target rate steady for the balance of the year as inflation continues to moderate. Yes, shelter and transportation costs remain stubbornly high. But oil continues to trend downward on global economic weakness, despite threats of production cuts from OPEC, and we don’t see the need to keep raising rates as inflation trends lower. What’s more, the Fed has another mandate besides keeping inflation low: it is also supposed to promote maximum employment. While the latest jobs reports have been consistent with GDP growth, we think the full impact of the Fed’s decisions over the past year have yet to be felt by the economy. We think the central bank may well be lowering rates in 2024 if core PCE falls to 3.5% or the jobless rate rises above the 4.0%-4.5% level over the next few quarters.

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