By Scott Hallermann.

As expected, the Federal Open Market Committee (FOMC) raised the target rate 1⁄4 point to an upper
bound of 5.25% at last week’s meeting (May 3). The policy implementation statement indicated, “the
Committee will closely monitor incoming information and assess the implications for monetary policy.”
Language indicating “the Committee anticipates that some additional policy firming may be
appropriate” was removed. My assessment is we have reached the terminal rate so long as the target rate remains higher than the increase in 1-year core PCE.

Market expectations per the Fed Futures curve now anticipates three 1⁄4 point cuts in 2023 beginning this fall. The scenario in which this would occur is an economy in recession with rising unemployment such that the FOMC prioritizes employment above price stability.

For an update on economic health so far in the 2 nd quarter, we received the April Employment Situation
report (May 5) which found net 253k jobs added in the month. While the reported number handily beat expectations, prior months negative revisions of -149k more than offset the surprise. In terms of a more binary review of employment trends, the non-seasonally adjusted Total Private job totals continue to increase on a monthly basis year to date with the April total 2.6% higher from a year ago. My net take away is that the FOMC will likely be able to prioritize its price stability mandate at least through the summer as suggested earlier.

Finally touching on implications to bank equities, last week’s stress following First Republic’s resolution
seemed to me to be wholly inorganic. By that I mean the market seemed to use anonymously sourced
leaked stories to proceed down the list targeting additional regionals that were ripe for fear speculation. For the moment this downward momentum seems to have been halted leaving the sector with hallmark characteristics for a strong relief rally as suggested last week.

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