On the July FOMC

Today’s hike in the funds rate to 2.375% brings us back to the too-tight level imposed at the infamous December 2018 FOMC, then as now, in the face of market turbulence and deteriorating macro conditions. The small market-implied probability for 100 bp today did not materialize, and as we expected, Powell made repeated hints that large hikes like today’s and June’s are likely over. He says it all depends on data (backward-looking inflation data to make forward-looking policy decisions, that is). He acknowledged low and falling inflation expectations only to the extent of taking credit for them. We expect that the two CPI reports before the next FOMC will be benign, and that September will end up bringing a hike of 25 bp at most. Already since the FOMC statement was issued, market-implied funds rate expectations have edged down while risk-markets have rallied.