Market Insights

The Federal Reserve may have reached “peak hawkishness” after seven months of embracing tighter monetary policy.

The central bank raised the target for its interest rates by 75 basis points today. The move matched expectations and mirrored a similar historic increase on June 15. Chairman Jerome Powell made some other interesting points at the subsequent press conference.

First, he said the next move on September 21 might be smaller depending “on the data we get between now and then.”

Second, he noted that “it likely will become appropriate to slow the pace of increases” as rates rise and policymakers study the effects of their actions.

Other aspects of the rhetoric got slightly less hawkish. Powell repeated that the Fed is “moving expeditiously” because “inflation is much too high.” He continued to invoke the bank’s dual mandate of controlling prices and promoting full employment. All of these were familiar from May and June.

However today brought new points about a weaker economy: “Growth in consumer spending has slowed significantly.” Contrast that with June, when Powell saw “consumption spending remaining strong.”

Business investment also got downgraded. June’s press conference said “growth in business fixed investment appears to be slowing.” (Notice there was still growth.) However this week, “business fixed investment also looks to have declined in the second quarter.”

That could reflect a slightly more dovish stance.

Data Dependent

Another concept gained importance in Powell’s post-meeting comments. It was data dependence, or a willingness to slow interest-rate hikes if the economy weakens or inflation slows. This week, he preemptively noted (without being asked) that policymakers “will need to be nimble in responding to incoming data and the evolving outlook.” Previous meetings were more unflinchingly hawkish.

Two more lines stood out:

• “We will continue to make our decisions meeting by meeting and communicate our thinking as clearly as possible.” This was followed by the above comment about the potential need to slow rate hikes.
• “We will strive to avoid adding uncertainty.”

That seems to instruct investors to keep watching the data and statements by Fed officials. We’ll have to wait almost two months until the next meeting, but Powell will speak at the annual symposium in Jackson Hole, Wyoming, August 25-27. Speeches by other members are also likely.

Peak Hawkishness?

Finally, traders may remember the influential role played this year by James Bullard of the St. Louis Fed. He was the guy who pushed the rest of the Open Market Committee to hike rates more aggressively in February. He then pivoted on July 14 to dampen worries of a 100 basis point mega hike. That kind of change — from the leading hawk — could suggest that the most dramatic actions are already in the rearview mirror.

Seventy five basis points in June. Seventy five basis points in July. And it could be less in September if the data warrants it.

After swinging from excessively dovish to super-hawkish, the pendulum may have reached its furthest extreme. One might even paraphrase Winston Churchill after the Battle of El Alamein in 1942. This week’s Fed meeting isn’t the end. It’s isn’t even the beginning of the end. But it was, perhaps, the end of the beginning.