As expected, the FOMC left the Federal Funds rate unchanged at 5.25%, the highest level since August 2007 and the first meeting without a rate increase since January 2022. While this news wasn’t surprising given comments by Chairman Powell post May’s meeting, which included his assessments that real (inflation-adjusted) rates were already ‘sufficiently restrictive” and the negative effects of credit contraction are likely coming, the market was understandably surprised by the changes made to their interest rate Dot Plot and Summary of Economic Projections (SEP) from the latest version delivered in March. Most notably, the Committee raised the median forecast for the terminal Federal Funds rate to 5.60% (5.1% March) and nudged up expectations of the Core PCE deflator to 3.9% (3.6% March), with the former drawing the most attention, particularly given the recent moderation in the inflation aggregates (CPI, PPI), higher jobless claims, jump in the unemployment rate and slower services growth. While the Chairman pointed out that Core PCE, the FOMCs preferred measure of inflation, has been stubbornly sticky (YOY 4.70% May/5.20% Sept. 2022), the Committee’s own projections call for 2023 Core PCE to come in at 3.9% and, more importantly, his discussion during yesterday’s post-meeting news conference conference appeared to imply that the condition. necessary to bend inflation to a sustainable path towards 2% were in place.
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