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By: Rhona O'Connell, Head of Market Analysis
The Statement following the latest FOMC meeting yesterday had a couple of important changes. The Statement starts as follows: (note the underlining is ours)-
“Recent indicators of spending and production have softened. Nonetheless, job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures”.
Compare this with the opening of the June Statement: -
Overall economic activity appears to have picked up after edging down in the first quarter. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures.
See the difference?
And in the second paragraph, the June reference to COVID-related lockdowns in China exacerbating supply chain disruptions has gone.
So the Fed’s stance remains broadly unchanged, certainly in term of inflation and data dependency, but the recent weakness in the housing market, the increased caution from the Beige Book (five Districts concerned about recession) and the falling PCE index (the next core PCE number is released today and called at 4.4% after 5.2% in Q1) will have raised a few red flags, especially as the Committee pays particular attention to the latter two parameters.
For more detail on the underlying shifts in the U.S. economy, and a wide range of other economic and financial elements, please see our latest Weekly Precious Metals Front Desk presentation here.
Key notes from Chair Jay Powell’s Press Conference include the following: -
Rather than giving specific guidance he said that the Committee would be looking for “compelling evidence” that inflation is moving down; he noted that they have now had two consecutive 75 point hikes and that “another unusually large” increase could be appropriate at the September meeting, but that data dependency remains key. Then (echoing Christine Lagarde here) decisions will continue to be made “meeting by meeting”; and – here’s the clue - “As the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases while we assess how our cumulative policy adjustments are affecting the economy and inflation”, while also pointing to the need to be nimble in response to evolving economic conditions.
Finally, it is worth noting that Chair Powell said that the Fed’s determination to return inflation to the 2% goal “is likely to involve a period of below trend economic growth and some softening in labor market conditions, but such outcomes are likely necessary to restore price stability and to set the stage for achieving maximum employment and stable prices over the longer-run”.
So he is not currently looking at “recession” per se, at least not yet.
Today sees the release of Q2 GDP numbers and if these are negative then the United States would technically be in recession, but it is not necessarily that clear; the National Bureau of Economic Research (largely academic economists) takes a wider view than the standard “two declining quarters”, looking rather at output, income, manufacturing, business sales and employment; combined with a judgment call.
U.S, EU and China yield curves
The U.S yield curves are currently all over the place, which Is not that surprising, while the bond markets are now projecting that the fed funds target rate will peak in December.
Bond market; implied target overnight rates
If there is one thing that’s certain about the current outlook, it’s continued uncertainty.
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