Yesterday, the Fed officials released their June interest rate decision. As expected, the officials raised rates by a quarter point. This was the second interest rate hike this year. The officials also increased their median forecast of the number of rate hikes we can expect this year to four. 8 of the officials voted to the four hikes from the 7 who voted for this in the past meeting.
In a statement after the rate decision, Jerome Powell said that the officials were optimistic about the economy. They also found no major impacts on the trade war that is expected to happen after the EU imposes tariffs on American imports. They were optimistic about the current pace of employment and inflation. On Tuesday, the CPI data showed that the inflation was at the 2% Fed target. The PPI data released yesterday showed that this too was happening.
Another major announcement was that the Fed chair would have a press conference after all fed meetings. The concept of these conference calls started in 2011 by Ben Bernanke, the then Fed chair. They were intended to help investors understand the thinking behind the Fed’s decision and provide stability in the market. He was quick to say that this new policy will not be a signal to anything.
The figure below shows the Fed dot plot. As shown, the decision showed that eight officials expected four or more rate increases for the year. The increase in the target range of 1.75% to 2% was widely expected but the steeper pace of rate hikes shown below was not widely expected. As a result, the S&P dropped by 0.4% while the 10-year yield was little changed at 2.97%.
The Fed meeting came at a time when the US economy has been boosted by a $300 billion increase in federal spending and a $1.5 trillion tax cut. This has brought down the unemployment rate to a 40-year low of 3.8%. More so, the number of job vacancies has recently increased than the number of people looking for work. This has reduced the number of people depending on food stamps and those filing for unemployment benefits.
Some investors are now getting cautious about the pace of rate hikes. On Tuesday, Jeff Gundlach, who runs the $110 billion hedge fund warned that increased tightening at a time when the country’s deficit was increasing was putting the country at a risk of a recession. The gap between the 2 year-yield and the 10 year have narrowed to just 0.4%, which means that the yield curve is inverting. If it does that completely, it will be the first time for it to do so in more than 10 year and the last time it did, the markets suffered a recession.
The EUR/USD pair was little moved after yesterday’s Fed decision. This was possibly because investors are waiting for the decision from the ECB later today.
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