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Tuesday, June 6, 2023

Fed Hikes 25bps As Expected, Signals ‘Hawkish Pause’; Warns Of ‘Tighter Credit Standards’

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The US Federal Reserve raised rates by 25 basis points as expected, with the policy statement softening the rate guidance in a way consistent with past pauses.

The Fed also deleted reference to “some additional policy firming may be appropriate.”

The decision was unanimous.

As WSJ Fed Whisperer Nick Timiraos notes: “The FOMC statement used language broadly similar to how officials concluded their interest-rate increases in 2006, with no explicit promise of a pause by retaining a bias to tighten.”

Since March 22 (the last FOMC statement, which included the dot-plot and economic projections), markets have been slightly risk on, but amid all that volatility, bonds and stocks are modestly higher while the dollar has tumbled and alternative currencies (bitcoin and gold) have outperformed.

However, The Fed’s preferred recession rate-spread indicator (3-month/18-month forward) is now flashing red implying a 94% probability of a recession within the next year.

Additionally, The Fed highlights the impact of the banking crisis:

The FOMC statement said tighter credit standards are likely to weigh on inflation and the economy.

The Fed also maintained its plan to shrink its balance sheet each month by as much as $60 billion for Treasuries and $35 billion for mortgage-backed securities.”

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