Fed Holds Rate Steady at 3.75%

1. The Federal Reserve held its policy rate steady at 3.75% in its latest meeting, but former Fed Vice Chair Roger Ferguson says a hike is still possible this year, citing high core PCE and CPI numbers [2]. This decision has significant implications for the markets, as a rate hike could impact economic growth and inflation.

What drove the move

The Fed's decision to hold the rate steady was driven by a combination of factors, including high inflation numbers and a strong labor market [2]. Core PCE, the Fed's preferred gauge, sat at 129.63 in April, the high point of the past year and a reading in the 90.9 percentile of the 12-month range [2]. CPI tells the same story, climbing to 333.979 in May, up 0.5% month over month [2]. Unemployment has stayed pinned at 4.3% for three straight months, which is firmly inside the healthy-labor-market band [2].

The new Fed Chair, Kevin Warsh, has also introduced a new approach, building consensus through task forces rather than dictating, and quietly dismantling the era of explicit forward guidance [2]. This approach has been described as deliberately procedural, with Warsh creating task forces to build consensus [2]. The removal of implied forward guidance from the Fed's official statement has also been seen as a significant change [2].

The competitive picture

The market reaction to the Fed's decision has been significant, with the 10-year/2-year yield spread collapsing to a 12-month low of 0.29% [2]. This has been driven by bond traders repricing policy without a dot plot anchoring expectations [2]. The Treasury curve has also been affected, with short rates creeping higher and the long end easing [3]. The 1-year yield has climbed from 3.83% on June 1 to 3.99% on June 24, while the 30-year yield has fallen from 4.99% to 4.86% over the same period [3].

What to watch

• The next core PCE print, which could tighten the window for the first hike if it surprises to the upside [3]
• The September meeting, where the Fed may revise its dot plot and provide further guidance on its policy approach [3]
• The services inflation number, which has been sticky at 3.76% year over year and could impact the Fed's decision to hike rates [3]

The real significance of the Fed's decision lies in its implications for the economy and the markets. With a rate hike still possible this year, investors will be closely watching the next core PCE print and the September meeting for further guidance. The open question remains whether the Fed will be able to balance its dual mandate of maximum employment and price stability, and what the impact will be on the broader economy.