• Fed raises overnight range to 5.25% - 5.5%.
• Sees economy “expanding at a moderate pace.”
• Fed members see rates rising this year with at least one more increase into the 5.6% area.
• Inflation remains “elevated.”

Highly attentive

The FOMC resumed its rate increase program today with another quarter-point increase in the overnight Fed Funds rate. The Fed started this rate increase cycle in March of last year and this is the eleventh increase in 12 meetings. Short-term rates are now their highest in 22 years. The Fed will continue to draw down its bond portfolio, which pulls excess reserves from the banking system. 

There were very minor changes to the press release. The important point was unchanged — that they will watch the data and react:

“In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals.”

There were several points we found important in the press release. First, the June press release stated economic growth was “modest” and today’s statement said it was “moderate.” We would interpret that change as a slight improvement. Recent job and service sector activity suggest moderate ongoing activity. Manufacturing output and industrial production have slowed over the last year. 

Second, the Committee repeated the warning from prior meetings that tighter credit conditions are likely to weigh on households and businesses. Mortgage rates rising from 3.5% to 7% have certainly put a crimp on housing activity. 

Finally, for future rate moves: “The Committee remains highly attentive to inflation risks.” That statement suggests to us that future rate increases are more likely than not. 

Powell presser

In his introductory remarks, Powell stated that the Fed “has a long way to go” to get inflation down and repeated from the press release that the Committee remains “highly attentive to inflation risks.” Congress gave the Fed the dual mandate of price stability and full employment. “The labor market remains very tight,” is an admission that the Fed is concerned about wage inflation. Higher for longer is the logical conclusion. 

Summary

We remain curious as to why the FOMC paused its rate increases in June. Powell says the Fed has not decided about whether to raise interest rates at an every-other-meeting pace. There are three more meetings scheduled this year: September 20, November 1, and December 13. Odds of a rate increase at the November meeting slightly increased during the press conference. One more increase this year would be consistent with the Fed’s end-of-year rate projections of an average 5.625%.

Market response after Powell’s press conference was muted. Three- and five-year Treasury rates moved slightly lower as traders began to prepare for “One and Done.” We remain on the fence, knowing the Fed is worried about wage inflation from strike threats and continuing worker shortages. We anticipate two more rate increases before the Fed stops this cycle. History suggests this cycle should end about 11 months before the next election or at the January meeting. 

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Steve Orr is the Executive Vice President and Chief Investment Officer for Texas Capital Bank Private Wealth Advisors. Steve has earned the right to use the Chartered Financial Analyst and Chartered Market Technician designations. He holds a Bachelor of Arts in Economics from The University of Texas at Austin, a Master of Business Administration in Finance from Texas State University, and a Juris Doctor in Securities from St. Mary’s University School of Law. Follow him on Twitter here. 

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