To no one’s surprise, the FOMC held its target rate for the federal funds rate constant at 5.25% to 5.5%. The main story emerged in the post-meeting press conference, where a wide range of issues were discussed. The first question set the stage for the main takeaway from the meeting. Simply stated, the questioner wanted to know whether a main reason for not changing policy was the fact that interest rates had risen and were effectively tightening policy, enabling the FOMC to wait on market forces. To illustrate, the following chart shows the Treasury yield curve at the beginning of the year, in April, and the day before and the day after this week’s meeting.
Not only have rates increased, especially on the short end, since early 2023, but the inversion has lessened as well. Long rates are now near 5%, resulting in mortgage rates now above 8.5% on average for a 30-year fixed-rate mortgage and over 7.6% on a 15-year fixed-rate mortgage. This increase in rates, as Chairman Powell emphasized, was likely to have a significant impact on housing in particular as well as market conditions more generally.
As for where the FOMC was in terms of future moves, Chairman Powell did state that future increases were not discussed, but the key question on the table was whether rates were sufficiently tight to enable the Committee to reach its 2% target range. He viewed the risks that further tightening would be needed v no more moves as roughly balanced and that the Committee could afford to wait on incoming data to assess whether further moves might not be needed. What he did state in response to a question was that a possible rate decrease was not on the table for the near term.
As for inflation, Chairman Powell repeated emphasized that progress was being made but noted that inflation was still above the target and the Committee was committed to achieving that goal. He was questioned on whether “wage inflation” was a concern, and he made two observations. He didn’t view wages increases as causing inflation, and he noted that wage growth had slowed significantly in the last few months and that labor markets, while still strong, were in much better balance.
One interesting question was whether the staff forecast had added back a recession in coming months. Chairman Powell first demurred, but then said it would be clear when the minutes came out that the staff had not included a recession. So this seemed to suggest that the Committee was counting on a soft landing and therefore it was reluctant to overshoot by raising rates if the change was not needed. To that point, when questioned on the economy’s strong growth, Powell noted that the Committee felt that growth below potential would be required for the inflation goal to be achieved. But he then went on to note that potential growth was not necessarily constant and that, coming out of the pandemic, the economy’s short-term potential was, in his view, higher than it might be in the longer run.
The bottom line from the Committee’s statement and information gleaned from the press conference was that the Committee was on course to achieve its objectives but that policy would have to remain restrictive, as it currently is, for some time. Beyond that, the strategy was to wait for more data to determine what that data might imply for policy.
Robert Eisenbeis, Ph.D.
Vice Chairman & Chief Monetary Economist
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