At the conclusion of its inaugural policy meeting of 2023 today, the U.S. Federal Reserve (Fed) delivered a smaller, quarter-point rate hike, as widely expected by markets. This was the smallest increase in the central bank’s key lending rate since March of 2022, when it first kicked off its tightening campaign. With the increase, the overnight rate now stands between a target range of 4.5% to 4.75%—the highest level since 2007. Markets were resilient in the wake of the latest rate hike, with the benchmark S&P 500 Index generally trading higher immediately following the press conference.
Restrictive monetary policy is weighing on the U.S. economy
It's clear that the U.S. economy is slowing down under the weight of restrictive interest rates. One of our favorite economic indicators—the Institute for Supply Management’s new orders index—fell to 42.5 for the manufacturing sector this morning. You have to go back 72 years to find a lower reading for this index, outside of an economic recession. Admittedly, it’s just one data point, but it is indicative of the broader slowdown we see taking hold across various leading indicators.
Price and wage inflation have decelerated in recent months, too. This is a welcome sign, but the Powell Fed has not seen enough progress here to say that the inflation fight is over. This is most evident in the FOMC (Federal Open Market Committee)’s post-meeting statement, where the committee notes that “inflation has eased somewhat but remains elevated” and that it “anticipates that ongoing increases in the target range will be appropriate.” Economists had speculated whether the plural increases in this latter line might be softened as the Fed nears the end of its rate-hiking campaign. This wording was left unchanged in today’s statement—likely deliberately—to send a strong message that the Fed remains committed to bringing inflation all the way back down to 2%.
Inflation is abating, but still too high