Last week, the US Federal Reserve (Fed) held its third monetary policy meeting of the year, raising the benchmark interest rate by a quarter of a point and setting it in a range of 5.0-5.25 percent.
Although the increase was in line with what was expected by the specialists, the market’s attention was focused on the content of the statement and the tone of the press conference by the president of the Fed, Jay Powell, looking for signs on the future trajectory for rates. of interest.
In the statement, the Fed acknowledged that economic activity maintained a modest pace of expansion but that job creation has remained robust despite the economic slowdown.
On the other hand, the Fed stressed that inflation remains high and the banking system solid and resilient despite the recent bankruptcies of some regional banks.
Unlike the March monetary policy decision press release, this time there was no explicit mention of the concrete possibility of additional monetary policy tightening measures. In fact, the statement and what Powell said at the press conference suggest that the Fed may have ended the current hike cycle that began early last year.
Specifically, the Fed established that the tightening of bank credit conditions, coupled with the lagged effects of a rapid and aggressive cycle of increases (in which the funding rate rose five percentage points in just over a year) and a slowing economy should help ease inflationary pressures.
Also, at the press conference, Powell acknowledged that, had it not been for the situation in the regional banking sector, the Fed would probably have had to continue raising the funding rate. However, the lower availability of credit for households and companies should support the Fed’s efforts to combat inflation.
Although everything indicates that the Fed has concluded the cycle of increases, the central bank will continue with its Quantitative Tightening process, that is, withdrawing liquidity from the market in a programmed and gradual manner.
Given this situation, futures are assigning a 90% probability that the Fed will leave the funding rate unchanged at the next monetary policy meeting scheduled for June 13-14. This percentage represents a considerable increase from the implied probability of 65% in the week before the Fed’s decision.
Where there continues to be a significant perception gap is in the expectations for the funding rate in the coming months.
Despite the fact that Powell did not make any comments anticipating changes to the guidance published by the Fed in March that calls for a funding rate at the current level for the remainder of the year, the futures market continues to price in between one and two rate cuts. a quarter point in the second half of the year.
In this columnist’s opinion, the Fed will continue to closely monitor the impact of tightening credit conditions on aggregate demand and employment, but unless there are signs of a clear recession accompanied by a sharp decline in inflation, the Fed will keep the funding rate unchanged for the rest of the year.
Futures assign a 90% probability that the Fed will leave the funding rate unchanged at the next policy meeting. In the week before the Fed’s decision, the implied probability was 65 percent.
