FOMC: Press conference more neutral than the marginally dovish policy statement
As summarised in our rates section, the May FOMC policy statement all but hinted at tightening credit conditions as the key driver of negative impulse to growth and inflation going forward. Initial market response to the statement was largely constructive, but it turned negative after Fed Chair Powell’s press conference, in which the lingering uncertainty on the direction of the economy and inflation was underscored. Chair Powell appeared to be still unsure about what constitutes “sufficiently restrictive” monetary policy that is consistent with the 2% inflation objective, which, in our view, is not an entirely quantifiable mix of forward-looking real rates, tightening lending standards, and the multitude of impacts from quantitative tightening.
Unless there are major financial market setbacks or a sharp slide in economic data, the mid-June FOMC meeting will also not be able shed a lot of clarity on the direction of monetary policy in the second half of the year. This uncertainty is what’s driving the negative sentiment in the market, in our view.
There are plenty of negatives brewing in the US economy, ranging from negative credit impulse to contraction in money supply, weak manufacturing to flat or declining home prices, dark clouds over commercial real estate to a string of bank failures, and growing concerns around the debt ceiling. But contrast this with the not-insignificant positives—still strong consumption, sustained expansion in the services sector, household net worth well above pre-pandemic levels, historic low unemployment, moderate wage increases, and a sharp decline in headline inflation.
A couple of prints of moderation in core inflation would be sufficient to solidify an extended pause in monetary policy, in our view, a prerequisite to an economic soft landing and some upside for asset prices this year. We think that’s coming, as do the markets. But the Fed officials have not closed the door for one or two more hikes entirely, which is what is causing the downdraft in asset prices.
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