Behind the Curtain: The FOMC Meeting in Review June 2023

The decision of the Federal Open Market Committee (FOMC) to refrain from firming policy at its June meeting but to signal future action was interesting. Chair Powell’s initial defense at his press conference repeated the logic of the statement that they were buying time to make a better-informed decision next time. Except, they believed that they already knew enough at this meeting to mark up their assessment of the appropriate policy rate by 50 basis points. The passage of time brings more data points, but not necessarily more understanding.

We were to be taught that the FOMC is flexible enough to patiently await confirmation of economic excesses that can be dealt with on another day, and in the process, market participants might stop hanging their outlook on each shiny new data point. The problem emerged when this ran counter to a straight read of the intermeeting data. A pause wasn’t a teachable moment. It was a mistake. Employment growth retains momentum, the labor market remains tight, and costs will keep inflation elevated. The real federal funds rate is only slightly positive, and financial conditions are easier after the rally in risk markets. Restarting rate firming will be a challenge that the Federal Reserve may not be up to. Selling the pause as awaiting new data only created confusion because the data were so compelling.