by Jade Thomason
Equity and Fixed Income Trader
At Ferguson Wellman, we are nearing the end of our Mid-Year Update events season, where we present updates to our yearly Investment Outlook and deepen our connections with clients and the community. Our theme, “Slaying the Dragon,” unveiled in January, is still pertinent, as inflation and the Fed’s progress in combating inflation are consistently top of mind. In conjunction with this theme, we have become accustomed to the release of economic data in a familiar cadence, and this week was no different.
Consumer Price Index (CPI) Release
This week’s first, and perhaps most awaited, release of economic data came Tuesday – the May 2023 CPI report. The headline CPI climbed 4% from a year ago, which was in line with consensus estimates and was the smallest increase since March 2021. According to The Wall Street Journal, headline consumer prices would have increased just 2.1% if we were to exclude shelter. Shelter costs mainly reflect rents, and the owners’ equivalent rent which is used to gauge the rental cost of a home. The Labor Department measures what renters are paying, and it has yet to capture how fast inflation is decelerating in the newly signed rental agreements. Rents are sticky in their decline, and once this is reflected, we will see CPI continue to trend lower, which is needed for the Fed to stop its interest rate hiking regime.
Sources: The Wall Street Journal, U.S. Bureau of Labor Statistics via St. Louis Fed
Federal Reserve Meeting
For the first time in 15 months, the Federal Reserve unanimously voted to hold off on interest rate increases and keep at their benchmark federal funds rate between 5% and 5.25%. The post-meeting statement reads, “Holding the target range steady at this meeting allows the Committee to assess additional information and its implications for monetary policy.” Prior to Wednesday’s announcement, the Fed raised the rate at 10 consecutive meetings since March of 2022 - the most aggressive series of increases since the 1980s. Investors always focus on the outcome of the Federal Open Market Committee (FOMC) meeting and this week, in particular, the comments and materials provided after the meeting were more telling than the actual outcome. This announcement was supplemented with a “dot plot,” which summarizes the FOMC’s outlook for the federal funds rate and details the expectations of each member. Fed officials expect the rate to peak at 5.6% this year, which is higher than their previous March projection of 5.1%, suggesting we will likely see two 0.25% hikes in 2023 – the first of which will likely occur when the Fed meets next in July. Markets reacted positively to this pause in rate hikes.
Takeaways for the Week:
The headline CPI rose 4% last month from a year earlier, which is above the Fed’s 2% target, but well below the peak of 9.1% last June
The Federal Reserve did not raise rates this week but alluded to two more hikes this year
The three major U.S. stock indexes hit their highest levels since 2022 this week