6/16/23 – Equites Interpret Skip as a Cut!

Chairman Powell must have re-watched the May 3rd post-FOMC press conference and not liked what he saw.  Recall that he was called out by CNBC’s Steve Liesman for his tepid answer when questioned about his knowledge of the issues surrounding Silicon Valley Bank.  His demeanor at the Wednesday conference was quite the opposite.  His first words, delivered in a forceful tone were “My colleagues and I remain squarely focused on our dual mandate…”, as if daring any of the reporters to assume otherwise.

Of course, he was speaking 30 minutes after the FOMC left the overnight rate unchanged.  We interpreted his tone as warning against any question of their inflation-fighting commitment.  The summary of economic projections of the committee members offers some insight into their thinking.  Despite leaving the overnight rate unchanged, the committee raised its Fed Fund forecast for the end of this year to 5.4% – 5.6%, an indication that they believe another rate hike will be warranted.  What likely drove that decision was the lowered forecast for the unemployment rate from 4.5% to 4.1% and the forecast for real GDP revised for this year from 0.4% up to 1.0%.

Powell made it a hawkish pause by saying, emphatically, that we’re “talking about a couple years out” for a rate cut.  Additionally, he emphasized that the pause was just that and not a movement to a new rate hike paradigm.

The inflation numbers this week portrayed an improving story.  The May consumer price index rose 0.1% from the April reading, representing a short-term victory, but the year-over-year measure is 4.0% higher than May 2022, double the FOMC target and not such great news.  But it is moving in the right direction and less than half of the 9.0% YOY rate recorded last June.

Of note was this morning’s University of Michigan surveys.  Sentiment and current conditions both improved while the expectation for inflation for the coming year fell from 4.1% to 3.3%.  We think that has much to do with the year-to-date rally in stock prices and relatively stable fuel prices of late.

Next week will bring housing data on Tuesday and Thursday and given the still elevated level of mortgage rates, we don’t expect any upside surprises, but you never know with seasonal adjustments this time of year.

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