US: FOMC reiterates the data-dependent stance – UOB

As expected, the Fed in its 25-26 Jul 2023 Federal Open Market Committee (FOMC) meeting, unanimously agreed to raise the target range of its Fed Funds Target Rate (FFTR) by 25-bps to 5.25%-5.50%, the highest in 22 years. This was the 11th rate hike in the Fed’s current rate tightening cycle following a brief pause in Jun after having raised rates for ten meetings in a row since Mar 2022. The Fed also voted unanimously to raise the interest rate paid on reserve (IOER) balances by 25-bps to 5.40%. 

The Jul FOMC monetary policy statement (MPS) only contained two material changes, 1) the 25-bps increase to the FFTR and 2) the upgrade of the growth outlook to “moderate” from “modest”. The greater emphasis was on Powell’s post-FOMC comments. Powell mentioned he believes that monetary policy is restrictive, but with core inflation still too elevated, he said the Fed needs to keep policy restrictive till they are confident that inflation is coming down sustainably to 2%. While he was non-committal to the possible course of Fed action in Sep FOMC, his emphasis on a “meeting by meeting”, data dependent approach (and yet “afford to be a little patient, as well as resolute”) gives an overall dovish feel to his press conference.

FOMC Outlook – On Hold For Rest Of 2023. The latest FOMC statement and dovish tone to Powell’s latest comments reaffirm our stance that after the Jul rate hike, the Fed will be on pause for the rest of 2023 with the terminal FFTR level at 5.25-5.50%. We continue to expect no rate cuts in 2023 but with rate cuts coming in from 1Q 2024 onwards. There is a risk that the Fed will hike by one more 25-bps, but we think the Fed [hiking] cycle is at/very near the end, and it is very unlikely to see FFTR go to 6%, in our view.