As expected, the Fed raised the Fed funds rate by ¼% to a 5.00% to 5.25% target range this past week and signaled that this rate hike is likely to be its last – unless….
- Its announcement dropped previous language that “some additional policy firming may be appropriate” and indicated that it is pausing to examine the cumulative impact of its tightening on inflation, the economy and financial developments, which occur with a lag over time.
- Chair Powell at his press conference, however, stated that “we are prepared to do more if greater monetary policy restraint is warranted,” which makes the CPI inflation report on Wednesday more important to how financial markets interpret what the Fed does next.
- With First Republic Bank having failed just four days earlier, Chair Powell’s statement that conditions in the banking sector “have broadly improved since early March” was surprising. He went on to hint that the Fed’s latest Senior Loan Officer survey, due for release today, will confirm that the severe, continuing tightening in credit conditions has worsened.
- We are already seeing how tighter credit conditions are driving a faster slowdown in economic activity than the Fed’s economic projections anticipated. With jobs growth cooling (see below) as well, we should see a faster decline in core inflation. With this, interest rates likely will decline as well beginning in the fourth quarter.
Last Friday’s report on April non-farm employment gains of 253,000 and a decline in the unemployment rate to 3.4% from 3.5% suggest a more robust U.S. jobs market than is the case, after considering downward revisions in March and February jobs growth.
- March jobs gains were revised down from 236,000 to 165,000, and February was revised down from 326,000 to 248,000, resulting in a three-month average gain of 222,000 which is the weakest since January 2021.
- The 3-month/3-month annualized growth in wages declined to 3.8%. As job vacancies continue to fall, there will be additional downward pressure on wage growth.
Q-1 earnings continue to come in better than expected and forward estimates are rising.
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