Economic Research View
U.S.: Review on July FOMC
Nomura Asset Management Co., Ltd. Published July 27, 2023

Atsushi Matsumoto, CFASenior Economist
The July FOMC has decided a 25bp-hike as widely expected. Fed Chair Jerome Powell explained
that, as the reason for this decision, the US economy and inflation have been broadly in line with theFOMC participants’ outlook, which suggested that they continued to have one additional hike in theirmind. While inflationary pressures have been recently easing in goods prices and rents, Powell said
that softening labor market conditions and wage pressures would be necessary for deceleration ofservices inflation, implying that disinflation without those softening factors will not make the Fed
convinced that inflationary pressures are being contained.

The FOMC decided a 25bp-hike as expected. No clear information for future decisions■

The July FOMC has decided a rate hike of 25bp as widely expected. Regarding the reason for thisdecision, Powell said “the intermeeting data came in broadly in line with expectations”. Since the outlook
shown at the June FOMC had expected two additional hikes, “data broadly in line with expectations” haswarranted a hike at this meeting.

■And the Chair’s comment also indicated another hike ahead, but he gave no clear information about its
timing. He said “we haven’t made a decision to go to every other meeting … it is certainly possible that
we would raise rates at the September meeting if the data warrants … (on the other hand) we shouldn’t
assume that every other meeting is the lowest tightening frequency”. Simply said, future decisions will
depend on incoming data.

Reasons for disinflation seem to be important to assess inflationary pressures■

There were many questions related to disinflation as the June CPI report had been weaker thanexpected. A reporter asked if the recent disinflation driven by goods and rents would be enough tohold rates, or economic growth below the trend and decelerating labor growth would be necessary
when the Fed assesses inflationary pressures. Chair Powell’s reply for this question was not that clear:
he only said “it’s hard to pick the pieces … we will be looking at everything”.

■

However, it seemed that Powell will focus on reasons for disinflation, taking care of labor market andservices inflation. As for reasons for the recent disinflation, he explained that both normalization ofsupply conditions and the Fed’s monetary policy had been behind the dynamics, and he added (sincethe benefits from the former have been reaped) “…going forward, monetary policy will be importantparticularly in the non-housing services sector…” and that wages and “…labor market conditions
broadly are going to be an important part of getting inflation back down and that’s why we think weneed some further softening in labor market conditions”. His comments suggested that reasons fordisinflation will be important in assessing the sustainability of disinflation, and disinflation without
weakening of wage pressures and the labor market will not make the Fed convinced that inflationarypressures are being contained.

■

Related to this explanation, Chair Powell seemed to be skeptical about the so-called “no landing” or“soft landing”. While he admitted that the resilience of the economy is a good thing, he said “at themargin, stronger growth could, over time, lead to higher inflation and that would require an appropriate
response for monetary policy”.

The terminal level of future rate cuts will be neutral rate, and continuing QT will be consistent withcuts■■■

Chair Powell mentioned three points related to rate cuts. First, as a reason for rate cuts, heexplained “if we see inflation coming down credibly and sustainably, we don’t need to be at arestrictive level anymore”. This clearly means that, as a result of inflation going back to the target,
the monetary tightening measured by the FF rate and inflation will tighten more, which will warrant
rate cuts to maintain or reduce the degree of the tightening (that said, reasons for disinflation willbe important).
Second, as for the terminal level of rate cuts, Powell said “we can move back to a neutral level andthen below a neutral level at a certain point”, which is consistent with the explanation above. Note
that, while I was focusing on Powell’s comments on the upside risk of a neutral rate, he said nothing
about that.
And third, regarding the QT in a cycle of rate cuts, he said that continuing QT will be consistent
with rate cuts because both rate cuts and QT are a process of normalization of monetary policy.
That is, rate cuts will be conducted to make restrictive monetary policy neutral, while QT will becontinued to make accommodative effects of the balance sheet neutral (less accommodative).

*This commentary is based on personal views of the author and does not necessarily represent Nomura AssetManagement house view.

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