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Wall Street, Gold surged on less hawkish Fed hike; USD stumbled

calendar 28/07/2022 - 19:53 UTC

Wall Street, Gold recovered and surged Thursday on a less hawkish Fed hike; USD stumbled. As highly expected, on Thursday, Fed hiked +0.75% and indicated further hikes @+0.50% or +0.75% in September, depending on inflation and labor market data. But Powell also indicated smaller hikes (depending on data) in November and December. Overall, Powell was quite confident about a softish landing despite faster Fed tightening.

After FOMC +75 bps rate hikes on Thursday, Fed funds rate futures forecast another 100 bps rate hike by Dec’22; i.e. 3.50% terminal rate, which is less than earlier projections of +4.00%. Subsequently, risk assets such as Dow, Nasdaq, S&P, Gold, and silver jumped, while the USD stumbled.

 

 

FOMC statement:

July 27, 2022

Recent indicators of spending and production have softened. Nonetheless, job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.

Russia's war against Ukraine is causing tremendous human and economic hardship. The war and related events are creating additional upward pressure on inflation and are weighing on global economic activity. The Committee is highly attentive to inflation risks.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 2-1/4 to 2-1/2 percent and anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt, and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve's Balance Sheet that was issued in May. 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 public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Lael Brainard; James Bullard; Susan M. Collins; Lisa D. Cook; Esther L. George; Philip N. Jefferson; Loretta J. Mester; and Christopher J. Waller.

Implementation Note issued July 27, 2022

Decisions Regarding Monetary Policy Implementation

The Federal Reserve has made the following decisions to implement the monetary policy stance announced by the Federal Open Market Committee in its statement on July 27, 2022:

The Board of Governors of the Federal Reserve System voted unanimously to raise the interest rate paid on reserve balances to 2.4 percent, effective July 28, 2022.

As part of its policy decision, the Federal Open Market Committee voted to authorize and direct the Open Market Desk at the Federal Reserve Bank of New York, until instructed otherwise, to execute transactions in the System Open Market Account in accordance with the following domestic policy directive:

"Effective July 28, 2022, the Federal Open Market Committee directs the Desk to:

Undertake open market operations as necessary to maintain the federal funds rate in a target range of 2-1/4 to 2-1/2 percent.

Conduct overnight repurchase agreement operations with a minimum bid rate of 2.5 percent and with an aggregate operation limit of $500 billion; the aggregate operation limit can be temporarily increased at the discretion of the Chair.

Conduct overnight reverse repurchase agreement operations at an offering rate of 2.3 percent and with a per-counterparty limit of $160 billion per day; the per-counterparty limit can be temporarily increased at the discretion of the Chair.

Roll over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing in the calendar months of July and August that exceeds a cap of $30 billion per month. Redeem Treasury coupon securities up to this monthly cap and Treasury bills to the extent that coupon principal payments are less than the monthly cap.

Starting in the calendar month of September, roll over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing in each calendar month that exceeds a cap of $60 billion per month. Redeem Treasury coupon securities up to this monthly cap and Treasury bills to the extent that coupon principal payments are less than the monthly cap.

Reinvest into agency mortgage-backed securities (MBS) the amount of principal payments from the Federal Reserve's holdings of agency debt and agency MBS received in the calendar months of July and August that exceeds a cap of $17.5 billion per month.

Starting in the calendar month of September, reinvest into agency MBS the number of principal payments from the Federal Reserve's holdings of agency debt and agency MBS received in each calendar month that exceeds a cap of $35 billion per month.

Allow modest deviations from stated amounts for reinvestments, if needed for operational reasons.

Engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions."

In a related action, the Board of Governors of the Federal Reserve System voted unanimously to approve a 3/4 percentage point increase in the primary credit rate to 2.5 percent, effective July 28, 2022. In taking this action, the Board approved requests to establish that rate submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, Dallas, and San Francisco.

This information will be updated as appropriate to reflect decisions of the Federal Open Market Committee or the Board of Governors regarding details of the Federal Reserve's operational tools and approach used to implement monetary policy.

Transcript of Chair Powell’s Press Conference Opening Statement

July 27, 2022

Good afternoon. My colleagues and I are strongly committed to bringing inflation back down, and we are moving expeditiously to do so. We have both the tools we need and the resolve it will take to restore price stability on behalf of American families and businesses. The economy and the country have been through a lot over the past two-and-a-half years and have proved resilient. It is essential that we bring inflation down to our 2 percent goal if we are to have a sustained period of strong labor market conditions that benefit all.

From the standpoint of our Congressional mandate to promote maximum employment and price stability, the current picture is plain to see: The labor market is extremely tight, and inflation is much too high. Against this backdrop, today the FOMC raised its policy interest rate by 3/4 percentage point and anticipates that ongoing increases in the target range for the federal funds rate will be appropriate.

In addition, we are continuing the process of significantly reducing the size of our balance sheet, and I will have more to say about today’s monetary policy actions after briefly reviewing economic developments.

Recent indicators of spending and production have softened. Growth in consumer spending has slowed significantly, in part reflecting lower real disposable income and tighter financial conditions. Activity in the housing sector has weakened, in part reflecting higher mortgage rates. And after a strong increase in the first quarter, business fixed investment also looks to have declined in the second quarter.

Despite these developments, the labor market has remained extremely tight, with the unemployment rate near a 50-year low, job vacancies near historical highs, and wage growth elevated. Over the past three months, employment rose by an average of 375,000 jobs per month, down from the average pace seen earlier in the year but still robust. Improvements in labor market conditions have been widespread, including for workers at the lower end of the wage distribution as well as for African Americans and Hispanics. Labor demand is very strong, while labor supply remains subdued with the labor force participation rate little changed since January.

Overall, the continued strength of the labor market suggests that underlying aggregate demand remains solid. Inflation remains well above our longer-run goal of 2 percent. Over the 12 months ending in May, total PCE prices rose 6.3 percent; excluding the volatile food and energy categories, core PCE prices rose 4.7 percent. In June, the 12-month change in the Consumer Price Index came in above expectations at 9.1 percent, and the change in the core CPI was 5.9 percent.

Notwithstanding the recent slowdown in overall economic activity, aggregate demand appears to remain strong, supply constraints have been larger and longer lasting than anticipated, and price pressures are evident across a broad range of goods and services. Although prices for some commodities have turned down recently, the earlier surge in prices of crude oil and other commodities that resulted from Russia’s war on Ukraine has boosted prices for gasoline and food, creating additional upward pressure on inflation.

The Fed’s monetary policy actions are guided by our mandate to promote maximum employment and stable prices for the American people. My colleagues and I are acutely aware that high inflation imposes significant hardship, especially on those least able to meet the higher costs of essentials like food, housing, and transportation. We are highly attentive to the risks high inflation poses to both sides of our mandate, and we are strongly committed to returning inflation to our 2 percent objective.

At today’s meeting, the Committee raised the target range for the federal funds rate by 3/4 percentage point, bringing the target range to 2-1/4 to 2-1/2 percent. And we are continuing the process of significantly reducing the size of our balance sheet, which plays an important role in firming the stance of monetary policy.

Over the coming months, we will be looking for compelling evidence that inflation is moving down, consistent with inflation returning to 2 percent. We anticipate that ongoing increases in the target range for the federal funds rate will be appropriate; the pace of those increases will continue to depend on the incoming data and the evolving outlook for the economy.

Today’s increase in the target range is the second 75 basis point increase in as many meetings. While another unusually large increase could be appropriate at our next meeting that is a decision that will depend on the data we get between now and then. We will continue to make our decisions meeting by meeting and communicating our thinking as clearly as possible.

As the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases while we assess how our cumulative policy adjustments are affecting the economy and inflation. Our overarching focus is using our tools to bring demand into better balance with supply to bring inflation back down to our 2 percent goal and to keep longer-term inflation expectations well anchored.

Making appropriate monetary policy in this uncertain environment requires a recognition that the economy often evolves in unexpected ways. Inflation has obviously surprised to the upside over the past year, and further surprises could be in store. We therefore will need to be nimble in responding to incoming data and the evolving outlook. And we will strive to avoid adding uncertainty in what is already an extraordinarily challenging and uncertain time. We are highly attentive to inflation risks and determined to take the measures necessary to return inflation to our 2 percent longer-run goal. This process is likely to involve a period of below-trend economic growth and some softening in labor market conditions, but such outcomes are likely necessary to restore price stability and to set the stage for achieving maximum employment and stable prices over the longer run.

To conclude, we understand that our actions affect communities, families, and businesses across the country. Everything we do is in service to our public mission. We at the Fed will do everything we can to achieve our maximum employment and price stability goals. Thank you. I look forward to your questions

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Highlights of Fed’s statement:

·         Job growth has been strong, and the unemployment rate has stayed low

·         FOMC vote in favor of policy was unanimous

·         Recent measures of expenditure and output have weakened

·         FOMC raises the main overnight interest rate along with other policy rates by +0.75% with the expectation of ongoing hikes at 75/50 bps depending on the actual inflation data

·         The war in Ukraine is putting extra upward pressure on inflation and weighing on global economic growth

·         The FOMC is strongly committed to returning inflation to its target of 2%

·         We are ready to change policy as appropriate

·         Inflation remained high because of pandemic-related imbalances, higher food and energy prices, and broader price pressures

·         Recent spending and production indicators have softened

·         The balance-sheet reduction will proceed as anticipated in September, with monthly runoff caps increasing to $35 billion for MBS and $60 billion for Treasuries

Highlights of Fed Chair Powell’s statement and Q&A:

·         We are continuing the process of significantly reducing our balance sheet

·         The FOMC has the tools to restore price stability

·         We are working quickly to reduce inflation

·         We must bring inflation down

·         The economy is resilient

·         Another unusually large increase in rates could be appropriate in September, it depends on the data

·         The rate of future increase will be determined by data

·         We are looking for compelling evidence of inflation coming down over the next few months

·         Although prices for several commodities have fallen, an earlier increase has raised prices, putting inflation pressure on inflation

·         Price pressures are broad

·         Overall labor market suggests that underlying aggregate demand remains solid

·         Broad improvements in labor-market circumstances

·         Inflation is well above the goal

·         It is most likely reasonable to slow the rate of increase when interest rates become more restrictive

·         Further inflation surprises could be in store

·         We will communicate our rate action plan with the market as clearly as possible

·         There was very broad support for the move at this meeting

·         I would not hesitate on a larger move if needed

·         Given the statistics, 75 bps was the correct decision

·         It is likely appropriate to slow the increases at some point

·         Inflation has remained disappointing

·         Our focus is going to continue to be on getting supply and demand in better balance

·         We've worked quickly to reach neutral

·         We're right in the range of what we think is neutral

·         Our mandate is for headline inflation, but we look at core as a better read

·         We will be looking at incoming statistics to see if there is a slowdown in economic activity that we believe is necessary

·         There is some evidence we are seeing that now

·         We will question if the policy is tight enough to bring inflation back down to the target

·         These recent hikes have been large and come quickly, the full effect not felt yet

·         It's time to go to a meeting by-meeting basis, and not provide a clear guide as before

·         We must raise policy to a somewhat restrictive level

·         We will question if the policy is tight enough to bring inflation back down to the target

·         It is difficult to predict the economy's state in the next 6-12 months with any certainty

·         As a result, the monetary policy rate range for next year cannot be predicted

·         It's time to go to a meeting by-meeting basis, and not provide a clear guide as before

·         We must raise policy to a somewhat restrictive level

·         Our thinking is that we want to get to a moderately restrictive level by end of this year. That means 3% to 3.5%

·         The most recent inflation report was worse than expected

·         Take estimates for rates next year with a grain of salt

·         The FOMC sees rate increases in 2023, and will update in September-- By September, we'll have more inflation data in hand

·         The most recent inflation report was worse than expected

·         Take estimates for rates next year with a grain of salt

·         We can look through volatile commodities prices in normal times. We can't just look through commodities prices now

·         Sustained supply shocks can de-anchor price expectations

·         We cannot maintain a vibrant labor market unless we reduce inflation

·         In all likelihood, we will need softening of the labor market conditions, and that will be necessary

·         We think we need a period of growth below potential to create some slack, and that will allow the supply side to catch up

·         It is required for growth to slow

·         Sustained supply shocks can de-anchor price expectations

·         The danger of doing too little increases the cost of dealing with it later

·         The path to a soft landing has narrowed, and it may narrow further

·         We don't believe we have to have a recession

·         Too many sectors of the economy are doing well

·         I do not think the US is currently in a recession

·         In all likelihood, we will need softening of the labor market conditions, and that will be necessary

·         Job creation and pay growth are substantial, which is not compatible with a recession

·         I tend to take first GDP reports with a grain of salt, but we will be looking

·         In general, GDP figures are subject to major revisions

·         Job creation and pay growth are substantial, which is not compatible with a recession

·         We haven't decided on the point to slow rate hikes

·         We are currently in neutral and will need to slow down at some time

·         We could do another extraordinarily significant rate hike, but that is not a choice we have taken, we will be guided by data

·         We will watch both the CPI and PCE data, but we think PCE is the best measure of inflation

·         Dot-plot estimates for June are the best predictors of the course of the FOMC rate

·         In the second quarter, demand is slowing

·         I see a slowing in the demand for housing and investment in Q2

·         We want to see demand running below potential for a sustained period

·         We believe demand is reducing, but we are unsure by how much

·         There has been some increase in initial claims, but that could be due to seasonal adjustment issues

·         Job creation is slightly slower than in the past

·         We want to see demand running below potential for a sustained period

·         Household surveys show much lower job creation

·         Some anecdotal evidence of slightly easier to locate workers

·         SWAPS suggests that the Fed rate will peak 100 bps or less above the current by Dec’22

·         The employment cost index on Friday will be a key signal

·         It could take 2 to 2.5 years to reach a new balance-sheet equilibrium

·         In terms of balance sheet reduction, the markets have accepted it and should be able to take it

·         The balance sheet lowering is working perfectly fine

·         I don't think I'd do forward advice in the way of September 2020 again

·         The Fed does not decide whether the United States is in a recession

·         A recession is defined as a broad-based decline, which does not appear to be the case right now

·         In my opinion, the natural rate of unemployment is higher

·         A recession is defined as a broad-based decline, which does not appear to be the case right now

Conclusions:

Overall, Fed Chair Powell looks less confident in inflation control and to justify ongoing rate hikes, is also not ready to acknowledge a possible technical recession. As per Powell, Fed is on the right path for faster tightening and calibrated slowing down of the economy, which is causing lower demand gradually and an eventual balancing with the present supply capacity of the economy. This will result in lower inflation in due course. But Fed is much behind the inflation curve and the U.S. economy is already in a stagflation-like scenario. The U.S. needs a real rate at positive or at least zero assuming a 5% core CPI by Dec’22. Thus the Fed’s terminal rate should be at least 5% instead 4% by Dec’22.

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