Notes from the Federal Reserves rate decision meeting Interest rates remain unchanged

Source: Zhibao
Summary
The Federal Reserve kept interest rates unchanged at this meeting.
The only significant change in the meeting statement was the shift from “a lack of further progress” in inflation from the previous meeting to “modest further progress,” reflecting the improvement in inflation data (CPI) just released yesterday.
QT Taper landed this month.
Overall changes in economic forecasts were not significant, but it is worth noting a slight upward revision in inflation forecasts. Since the May PCE inflation data was already announced at 2.8%, this adjustment in forecasts gives the illusion that inflation improvement has already met the target.
The dot plot fulfilled the “upside risks” from the previous March dot plot, with 15 committee members believing that a rate cut will happen within the year, but there is a split on whether it will be once or twice.
Long-term rate forecasts were raised for the second consecutive meeting at the end of the quarter, reflecting subtle changes in Fed officials’ expectations for the central level of long-term rates. However, Powell downplayed the importance of this change in the Q&A session.
The dovish bias in the press conference was noticeably weakened, mainly due to the CPI data released earlier altering the tone and atmosphere of the conference. The improvement in inflation data made Powell appear more confident and in control.
The U.S. stock market maintained its upward trend after the release of inflation data but later experienced a slight dip, while U.S. bond yields and the dollar index rebounded after a sharp drop.
The author believes that the Fed may clearly outline the conditions for rate cuts in the second half of the year at the Jackson Hole meeting in August, at which point Powell will also receive more comprehensive support from inflation data.
Image: Powell’s purple tie pattern changed to reflect modest further progress, from left to right for the four meetings in the first half of this year.
Image: The improvement in inflation data relieved Powell and changed the tone and atmosphere of the entire press conference.
Statement Original Text (key changes in bold)
Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have remained strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated. In recent months, there has been modest further progress toward the Committee’s 2 percent inflation objective.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals have moved toward better balance over the past year. The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks.
In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‐backed securities. The Committee is strongly committed to returning inflation to its 2 percent objective.
In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.
Dot Plot and Economic Forecasts
Along with a slight upward revision in inflation forecasts, rate forecasts were also raised.
After the rate hike in March, long-term rate forecasts continued to be raised by 0.2% at this meeting.
One rate cut within the year (7 members) vs. two rate cuts (8 members)
Some Interesting Details from the Press Conference
Reiterating the management posture of balanced risks
We know that reducing policy restraint too soon or too much could result in a reversal of the progress we’ve seen on inflation. At the same time, reducing policy restraint too late or too little could unduly weaken economic activity and employment.
Officials updating their SEP forecasts in real-time after data releases! However, most officials do not do so.
Answering questions about the continuous upward adjustment of long-term rate forecasts
But I want to remember to point out that the long-run neutral rate of interest is a long-run concept. It really is a theoretical concept, it can’t be directly observed, and what it is is the interest rate that would hold the economy at equilibrium, maximum employment, and price stability, potentially for years in the future where there are no shocks, so it’s a little bit — it’s not something we observe today.
But back to your original question, people have been gradually writing it up because I just think people are coming to the view that rates aren’t going to — are less likely to go down to their prepandemic levels, which were very low by recent history measures.
Emphasizing that the level of the long-term neutral rate is unobservable, but many officials indeed believe that rates may not return to the historically low levels before the pandemic.
Answering questions about the significance of a 25bp rate cut
I think if you know, if you look back in five or ten years and try to pull out the significance to the US Economy of one twenty-five basis point rate cut, you’d have quite a job on your hands. So that’s not how we look at it. You know, really the whole rate path matters, and I do continue to think that when we do start to loosen policy, that will show up in a significant loosening in financial market conditions, and the market will price in what it prices in, I don’t I have no way of saying we’re not at that stage, so I don’t know.
Looking back in history, it would be difficult to analyze the impact of a 25bp rate cut on the U.S. economy, but I believe that loosening policy will be reflected in significantly looser financial market conditions.
(The author raises a question here: in fact, the relaxation of financial conditions and the related pricing require continuous forward guidance and easing commitments. If the rate-cut cycle becomes bumpy in the future – for example, if a rate cut does not signal further cuts at the same time – how would the market price in more easing at that moment?)
Answering questions about where the inflation pressures are coming from
You know, in some parts of non-housing services, you see elevated inflation still, and that’s probably to do with it could be to do with wages, goods, prices have kind of fluctuated. There’s been a surprising increase in import prices on goods, which is kind of hard to understand and, you know, maybe we’ve taken some signal from that, but you know, and of course, housing services, you’re seeing, you’re continuing to see high readings there.
Powell believes that services (including housing and non-housing) warrant caution as wages are also high.