Restrictive but no recession
July 27, 2023
-As expected Fed hiked 25. Powell mentioned several times that policy is restrictive. but also said that Fed staff no longer forecasts recession. WSJ’s Timiraos asked about whether inflation projections in September’s SEP would come down (by 20 or 30 bps). In June PCE prices for end-of-2023 were marked down from 3.3% in March to 3.2%, while Core was raised to 3.9 from 3.6. PCE price data is released tomorrow. Another question centered on easing financial conditions (lower USD, higher stocks) and Powell noted SLOOS will be released on Monday (Sr Loan Officer Survey on Lending).
–Yields fell post-Fed. Tens down 6.3 bps to 3.847%. 2y down 6.4 to 4.827%. Red sofr contracts +10.5. August FF were unchanged at 9467.5 as yesterday’s hike had already been priced. The lowest contract on the FF curve is November which settled +1.5 at 9457.5, 10 lower than August, so the market still leans toward another hike at one of the next two meetings.
–When asked about the possibility of easing which has been consistently priced into the SOFR curve, Powell said the Fed is not likely to ease this year “I don’t think…” Quite surprising as he could have been more forceful and definite and said something like, “The Fed is not contemplated any easing in the near future; we need to maintain restrictive policy.” Obviously some members are leaning toward the idea of easing. I would note that SFRZ3/M4 6-month calendar settled -62 (9462/9524) which was down 3 on the day; 3 to 4 quarter point cuts being priced into the first half.
