The Federal Open Market Committee met the last week of July. There were no changes to the Fed funds rate. Here is a summary of their statement and some interpretation of what the Fed statement means.  

Randolf Westlund's (Chief Investment Officer, CRBT) summary of the Fed's commentary:

Statement Summary:

Some minor changes which may suggest positive lean(?): “jobs gains have moderated,” “some further progress” toward inflation goal (though still “somewhat” elevated”), and risks “continue to move into better balance.” Ongoing securities portfolio activity.  Fed funds rate maintained at 5.25%-5.50% (Unanimous vote).

There is an old saying about communication: “I know you believe you understand what you think I said. But I'm not sure that you realize that what you heard is not what I meant.”

In the aftermath of the Fed statement and the ensuing press conference, it is unclear whether this old saying applies to the statement or Mr. Powell’s Q&A. Read on its own without color commentary, the statement appears to repeat the steady Fed message: there will come a day, but this is not that day, and we cannot say what day that will be.  Listening to Mr. Powell address the repeated question “But it will be in September, right?” many heard that day could come as early as September.  Mr. Powell took pains to reiterate the not-yet mantra, including saying “there is no certainty in our business.”

Remember the Tom Cruise movie “Jerry Maguire?” In that iconic scene, Jerry returned to his wife and wrestled with sharing his feelings.  Part way through his attempt, she interrupted him with, “Shut up, just shut up… You had me at hello…”  Well, when the bond market heard Mr. Powell utter “September,” they effectively said, “shut up, just shut up… you had me at September…,” and off they went.  Of course, the earlier part of the day already featured a strong tech stock-led market rally and a bond market positive tilt, but the half-hour after the press conference saw a bigger tech tilt and a further market rate decline in the markets’ apparent glee.

So, is the confluence of “higher for longer” and “pause, not pivot” still the best descriptor of the Fed’s stance?  Committed to quell too-high inflation in an economy propelled by a solid but “normalizing” labor market, is its work almost done and its time for easing come? Mr. Powell responded with maybe close but not yet confident enough. One quarter of selected data points is not a true trend yet.  Further, the Fed is data-dependent (plural) and not data-point dependent, meaning no specific number is going to tip the balance into rate cuts.  Again, markets ignored our old saying above and heard what they wanted to hear. 

But think about it, if the markets leave the Fed behind and “cut” rates anyway, the economic benefit for why markets want to argue the Fed into more cuts may already begin to happen.  If “higher for longer” economic conditions are now further supported by the market pushing down the cost of borrowing, the purpose for the Fed stance of watch and wait remains (higher sustained demand = higher sustained activity = sustained higher inflation), and that ongoing uncertainty of upcoming conditions continues to give pause. Indeed, Mr. Powell repeated that policy is restrictive, but more progress on inflation is needed to increase the unified Committee’s confidence that inflation is on a sustainable slowdown path.

Market volatility will continue as markets try to both second-guess the Fed and front-run an earlier start to rate cuts.  Again, markets will keep asking “are we there yet?” and the day will come when the answer is yes.  In that eventuality, though, the what-comes-after-that is still unknown and will remain so. Alas, we do not have the luxury to ride with Dr. Brown “Back to the future” to see what’s next. Perhaps the Fed has taken a rate increase off the table, but we will have to wait until September to see if a rate cut is actually on the table (and wait even further to see if one-and-done or one of several to come lies in our future).

In sum, as we have said before, data-dependency is uncomfortable, and markets may remain volatile as various elements prompt actions and reactions.  At the core, conditions are solid, caution likely prompts more considered and better decision-making, and we believe that economic momentum will keep us moving ahead.  

This commentary was prepared by Cedar Rapids Bank & Trust and is intended for your private use. This material reflects the current opinion of the Investment Group based upon sources believed reliable but not guaranteed by it. Opinions expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.