May Fed meeting: Hike and watch

Executive summary:

  • 미국 연방준비제도 (Fed 연준)가 기준금리를 25 basis point 인상하면서
    22년 3월 이후 금리는 누적 500 basis point 인상.
  • 6월 연준의 금리 인상 여부는 노동시장과 인플레이션 하락에 달려있음.
  • 제롬파월 의장은 비록 미국의 경기 침체로 이어지더라도 인플레이션이
    연준의 최우선 목표임을 강조함에 따라, 당사는 경기 침체 위험이 높아진 것으로 예상함.

미 연방준비제도이사회 (FRB)는 5월 3일자로 기준금리를 0.25포인트 인상. 이는 2022년 3월 제로 금리 이후 누적 500 basis point 상승한 수치이며,
잠재적으로 통화 긴축정책이 이어지지 않을 수 있음을 시사함.

Is the Fed hitting the pause button?

Today’s hike was widely anticipated, with fixed income markets pricing a 90% probability on the outcome. Most investors were focused on what guidance they could glean about the Fed’s interest rate strategy going into June and beyond. Basically, was this the last rate hike for the cycle or not?

The Fed took a page out of its June 2006 playbook in signaling a pause today. Here’s a side-by-side:

“In determining the extent to which additional policy firming may be appropriate, the Committee will take into account…economic and financial developments.” – May 2023.

“The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth” – June 2006.

Source: Board of Governors of the Federal Reserve System.

That’s textbook Fed to send a signal and preserve optionality. The next decision in June will hinge on the performance of the U.S. economy between now and then. If the FOMC (Federal Open Market Committee) sees more evidence that the labor market is cooling down and more evidence that inflation is on a glidepath back toward 2%, then this hike will likely be the last. If the FOMC doesn't see this, they will likely hike again. It’s hike and watch—it’s data dependence—it’s normal.

Ultimately, this was not a hawkish pause or a dovish hike. It was right down the fairwaytextbook central banking.

How are banking issues impacting the outlook?

While most investors were focused on the Fed’s forward guidance—which is clearly important—we were arguably as interested, if not more interested, in what Chair Powell had to say about recent developments in the banking system. This is because the Fed has better and timelier data on the banks than investors do, including data on the degree to which banks have tightened their lending standards in the wake of the Silicon Valley Bank failure. Powell had that information to inform today’s decision; we get it next Monday. He indicated in the press conference that the strains from the banking crisis in early March “appear to be resulting in even tighter credit conditions for households and businesses.”

Recession risks vs. inflation concerns: The dilemma facing the Fed

Central banking is not a precise science. The Fed’s decisions are made based on conflicting signals about the current health of the economy, very uncertain forecasts about the economy’s future and knowing any decisions it makes will not be fully felt for months. It’s a herculean task. Because of the imprecision involved, decisions—in practice—are made through a risk-management lens.

And the decisions facing the central bank are table-stakes. Does Powell prefer to raise rates too high—to get inflation under control while risking a recession along the way? Or, does he prefer to err on the side of caution, prioritizing economic growth but risking another wave of damaging inflation?

The bottom line: Taming inflation is the Fed’s #1 priority—even if it triggers a recession

We know—from repeated public statements—that Powell is emphasizing the former. He is committed to getting inflation back down to 2% and is willing to risk a recession to make that happen. Case in point: he hiked rates in March despite his staff of more than 400 Ph.D. economists telling him that a recession was likely later this year.

That risk management context is critical here and part of why we think recession risks are elevated. Overtightening is not the mistake the Fed is worried about making.