Introduction to the Federal Reserve’s Decision
The Federal Reserve, led by Chairman Fed Powell, has announced its decision to keep interest rates unchanged at 4.25% – 4.50%. This decision was largely expected, but it came with two dissents, the first time two Fed officials have dissented since 1993. The dissents were from Waller and Bowman, who voted for a 25 basis points (bps) cut.
Key Points from the Federal Reserve’s Statement
The key points from the statement include:
- No rate change, as expected.
- Waller and Bowman dissented, voting for a 25 bps cut.
- Kugler did not vote at this meeting, which was preannounced.
- The economic outlook remains elevated, but the phrase that it “has diminished” was dropped from the June statement.
- Growth was described as moderating in the first half of the year, softening from the prior “solid pace” language.
- Unemployment remains low, labor markets are solid, and inflation is somewhat elevated.
- There were no hints at future cuts; the Fed remains in a data-dependent, wait-and-see mode.
- The Fed will carefully assess incoming data, the evolving outlook, and the balance of risks.
Market Reaction
Following the announcement, the USD retraced some of its earlier gains but remains near its high. US stocks initially remained higher, with the S&P up 0.26% and the NASDAQ index up 0.50%, but as the press conference progressed, the indices turned negative. The US 2-year yield was at 3.879%, up 0.4 basis points, and the 10-year yield was at 4.346%, up 1.8 basis points. Gold and Bitcoin also saw movements, with gold down $29 or -0.87% at $3298 and Bitcoin down $170 at $117,710.
Press Conference Highlights
During the press conference, Chairman Powell mentioned that the economy is in a solid position, inflation is somewhat above target, and the current stance of policy leaves the Fed well-positioned to respond in a timely way. He also noted that moderation in growth reflects a slowdown in consumer spending and that the activity and housing sector remains weak. Powell emphasized that unemployment is low and has remained in a narrow range, and most measures of long-run inflation expectations are consistent with the Fed’s goal.
Q&A Session
The Q&A session covered various topics, including the modest restrictiveness of the current policy stance, inflation running a bit above 2%, and the economy not behaving as if rates are holding it back inappropriately. Powell mentioned that there are downsides risks in the labor market and that the main number to watch is the unemployment rate. He also discussed the impact of tariffs, stating that they are starting to show up in some consumer prices, but the Fed will ensure this does not turn into serious inflation.
Market Movements During the Press Conference
As the press conference progressed, the S&P index turned negative, down -0.4%, and the NASDAQ index pared its gains to a 0.25% increase. The Dow Industrial Average was down -0.20%. The USD continued its move to the upside, with EURUSD moving below the 50% midpoint of its move up from the May low and GBPUSD testing the 50% midpoint of its move up from the April low. USDJPY moved above its 50% midpoint, looking toward the 200-day moving average.
Conclusion
The Federal Reserve’s decision to keep interest rates unchanged, combined with the insights from Chairman Powell’s press conference, provides a nuanced view of the current economic landscape. The Fed’s cautious approach, considering both inflation and employment data, reflects its commitment to achieving its dual mandate. As the economic situation evolves, the markets will continue to react to the Fed’s decisions and statements, making for an interesting landscape for investors and economists alike. The upcoming data releases, including employment and inflation figures, will be crucial in determining the Fed’s next steps, keeping the financial world attentive to future announcements.
