PIMCO: Fed Reaction

By Tiffany Wilding, North American Economist at PIMCO

• As widely expected the Federal Reserve raised their target interest rate by 75 basis points taking the midpoint of their target rate range to 2.35% - just below their estimate for a neutral policy stance in the longer run.
• At the press conference Chair Powell also guided that “modestly restrictive” monetary policy is warranted by the current economic fundamentals, including elevated inflation, and mentioned that another outsized move in the Fed Funds rate may be necessary in September in order to ensure monetary policy is restrictive.

The Treasury market rallied in response to the statement and Powell’s comments, suggesting that markets were pricing in the risk of a more aggressive action in light of the recent inflation surprises.

Indeed, inflation in much of the world has been more persistent than many central bankers anticipated. This has raised the concern that a recession – not just a period of below-trend growth – may be needed to restore price stability. This appears especially true in the US, where, although US headline inflation will likely move lower over the coming months due to the recent decline in global oil and agricultural prices, wage and rental market inflation – two areas where price trends tend to be more persistent – have actually accelerated (for example, see the Atlanta Fed’s Wage Growth Tracker).

While there is uncertainty around the exact level of the fed funds rate that is consistent with the “modestly restrictive” guidance provided by Chair Powell, what is clear is that FOMC officials don’t believe they have reached it yet, and it could be closer to the 4% 2023 peak in the median SEP rate forecast provided in June.