A review of the FOMC Press Conference on 03 May 2023
It was an interesting press conference yesterday. The Fed Chair seemed quite a lot more calm and collected despite all the bank failures erupting around us.
Well, at least they did take some responsibility for that. While we know that some of the failures were purely poor management on the parts of the banks, we also know that the Fed’s aggressive tightening led to many of these. In either case, regulatory responses could have perhaps alleviated some of the distress. And there is distress.
Post market close, we heard about yet another exploring a sale - PacWest Bank. And the Regionals continue to fall with fervor.
And despite what Jamie Dimon or J. Powell says, this story is not over. I am not hoping for further bank collapses by any means but I would against buying into any of these at these stage until the storm clouds really have passed.
Back to the Fed.
We saw an interesting change in language in the Fed’s statement that seemed to suggest that this was going to be the Fed’s last rate hike. But, as I suspected, during the press conference, he left the door open to further hikes. While the discussion suggested that they were not looking to hike, he emphasized that this would depend on the data and a decision would be made at the June meeting.
The market doesn’t seem to want to believe the Fed yet again and is pricing in a rate cut by September 2023. This isn’t the first time thought. The market has been wrong about pricing in Fed cuts for months now and there doesn’t seem to be any reason not to believe the Fed. The Fed Chair confirmed that they were not looking at rate cuts this year.
They have proven their resolve in terms of making inflation their priority and they’re sticking to that. When asked about whether they could live with 3% inflation, Fed Chair Powell reiterated that 2% was the target and they would not “drop their tool” and would need to be at it for a while.
Unemployment and Wages
While it would seem that unemployment still remains tight, at 3.5%, there’s no doubt that the Fed sees an increase coming. For the first time, the Fed Chair seemed relieved that with job openings declining the employment market is coming back into better balance between supply and demand.
Wages are still running too high and while they don’t think this is causing a wage spiral or increasing inflation, they do want to see it back down at 3% YoY. We got the Employment Cost Index this month and we saw an acceleration in the numbers.
Tightening Conditions and Recession
Chair Powell seems pleased that the credit conditions are tightening and if anything this will do their job for them. As I discussed last time around, tightening conditions are akin to rate hike and when the level of debt circulating in the economy declines we tend to see lower reinvestment and growth.
It should come as no surprise that one of the biggest declines we saw in the GDP numbers was in equipment spending leading to a very low level of growth in the fixed investment side of GDP.
To add to that, he discussed that as inflation starts to decline so will profit margins. So not only do we have revenues declining because of demand destruction, we also have margins and therefore, profitability decline. And there’s more to go.
The Fed Forecasters are still pricing in a mild recession while Chair Powell seems to think that the US won’t get a recession. It remains to be seen whether a recession ensues or not but, it is definitely likely that there will be a period of low growth that is perhaps necessary in the fight to inflation and clearing out the excesses of the last 15 years.
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