No Recession?

It appears that the Fed is getting close to the end of rate increases

Summary: The Fed raised rates again last week but as long as economic data doesn’t surprisingly shift, it appears that they are getting close to the end of rate increases. Monetary policy is restrictive, but the economy, especially the consumer, has remained resilient with signs of rebounding activity in several segments. Did the Fed engineer a soft landing?

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Macro

The Fed raised rates again

“Today, we took another step by raising our policy interest rate 1/4 percentage point, and we are continuing to reduce our securities holdings at a brisk pace. We have covered a lot of ground, and the full effects of our tightening have yet to be felt” - Fed Chair Jerome Powell

The FOMC will be watching incoming data to see if further increases are necessary

"Between now and the September meeting we get two more job reports, two more CPI reports. I think we have an ECI report coming later this week, which is the employment compensation index, and lots of data on economic activity. All of that information is going to inform our decision as we go into that meeting. I would say it is certainly possible that we would raise funds again at the September meeting if the data warranted and I would also say it’s possible that we would choose to hold steady at that meeting." - Fed Chair Jerome Powell

But current monetary policy is meaningfully restrictive

“The real federal funds rate is now in meaningfully positive territory. If you take the nominal federal funds rate, subtract a mainstream estimate of near-term inflation expectations, you get a real federal funds rate that is well above most estimates of the longer-term neutral rate. So I would say monetary policy is restrictive, more so after today’s decision, meaning that it is putting downward pressure on economic activity and inflation. We’ll keep monetary policy restrictive until we think it’s not appropriate to do so.” - Fed Chair Jerome Powell

And risks from monetary policy are relatively balanced

"I’d say it this way, it’s really a question of how do you balance the two risks, the risk of doing too much or doing too little? And, you know, I would say that we’re coming to a place where there really are risks on both sides. It’s hard to say exactly whether they’re in balance or not. But as our stances become more restrictive and inflation moderates, we do increasingly face that risk. But, you know, we need to see that inflation is durably down that far." - Fed Chair Jerome Powell

It’s not time to cut rates

"I’m not giving you any numerical values around that. I’m saying we would—we’d be comfortable cutting rates when we’re comfortable cutting rates. And that won’t be this year, I don’t think. It would be—you know, many people wrote down rate cuts for next year. I think the median was several for next year." - Fed Chair Jerome Powell

There is still some inflationary pressure

"...we're seeing some inflationary pressure both on the labor line and in some of the food areas when you pull out avocados. So it's something that we're looking hard at." - Chipotle Mexican Grill (CMG 0.00%↑) CEO Brian Niccol

But economic activity has slowed

"But from our perspective, if you look at our data, as an industry and as a business, we are already operating in an environment that is indicative of what we would call the garden variety recession level for now a number of quarters in the U.S. and more quarters in Europe… you see our industry is coming down to a lower level. You've seen hours worked coming down. You've seen more part-time people looking for full-time work. So the indicators are all there for a slightly worsening labor market” - ManpowerGroup (MAN 0.00%↑) CEO Jonas Prising 

The Fed’s staff is no longer forecasting a recession

"So the staff now has a noticeable slowdown in growth starting later this year in the forecast. But given the resilience of the economy recently, they are no longer forecasting a recession." - Fed Chair Jerome Powell

The consumer is very resilient

"The consumer is demonstrating how resilient they are. Both the lower-income consumer and kind of our higher-income consumers are showing really good strength. I think that's why we had such a strong traffic performance in the quarter, and we continued to exit that quarter with really healthy traffic or transaction trends. So we're not seeing any weakness in the lower-income consumer. If anything, they've continued to improve, and we're feeling really good about the value proposition we're providing all income levels." - Chipotle Mexican Grill (CMG 0.00%↑) CEO Brian Niccol

“Consumer spending has remained resilient with spend on experiences and travel remaining of focus” - Mastercard (MA 0.00%↑) CEO Michael Miebach

"Consumer spend across all spend bands from affluent to low spend remained stable since March. Our data did not indicate any behavior change across consumer segments. Putting all this together, we continue to believe that the primary driver of the step-down in U.S. payments volume growth since March is moderating inflation and that the consumer has remained resilient so far." - Visa (V 0.00%↑) CFO Vasant M. Prabhu

International