Fed delivers fuzzier rate message as it gauges impact of hikes

Abstract

At the start of the hiking cycle, Chair Jerome Powell said the goal was "Getting rates back up to more neutral levels as quickly as we practicably can." In May he walked back from the concept of neutral - a level that neither slows nor speeds up growth - cautioning that the discussion had a "Sort of false precision."You know, you're going to raise rates, and you're going to be kind of inquiring how that is affecting the economy through financial conditions," he said. "We are certainly looking at financial conditions as a key guide as to how much policy tightening is required," said David Page, head of macroeconomic research at AXA Investment Managers. "Powell used the term"financial conditions" more than a dozen times at his post-meeting press conference in May, noting that officials "need to look around and keep going if we don't see that financial conditions have tightened adequately. Deutsche Bank says that would be more than 0.7 on the adjusted Chicago Fed National Financial Conditions Index, which right now is near zero. While financial conditions have tightened a lot since the Fed began signaling its intention to confront inflation, some credit costs have gotten cheaper in the last few days. "The recent improvement in credit conditions is mostly because the Fed has provided clarity to the market as what they would be doing almost until September," Kabra said, allowing investors to focus on fundamentals. Minutes of the Fed's May meeting suggested policy flexibility later in the year while Atlanta Fed chief Raphael Bostic floated the idea of a September rate-hike pause.