Fed moves closer to neutral, but will that be enough?

Is the US economy already in recession? We will find out tomorrow (Thursday) whether GDP declined in Q2 for the second straight quarter, meeting the commonly-used (if not exactly official) definition of a recession. It's quite certain that the Federal Reserve already knows what the data will reveal, but whatever that may be, it has not been deterred from a further aggressive rate hike. As expected, today's FOMC meeting ended with a 75 basis points hike in the funds target range, which now stands at 2.25-2.30 percent. 

The FOMC press release is sparse to the point of being minimalist. It acknowledges that "recent indicators of spending and production have slowed", but stresses that job gains are strong and the unemployment rate remains low.  Does this form of words hint that Q2 GDP will indeed be negative? Tomorrow will tell.

As for inflation, the FOMC says it is "highly attentive" to inflation risks. It points to pandemic related imbalances, higher food and energy prices and "broader price pressures" as areas of concern. It remains "strongly committed" to restoring inflation to the 2 percent target, and so expects that "ongoing increases in the target range will be appropriate", as well as further shrinkage of the Fed's own balance sheet. 

By raising rates by 150 basis points over the course of two meetings, the FOMC has moved monetary policy much closer to what would be considered a "neutral" level in more normal economic times.  This might suggest that future increases will be smaller, but having waited so long to start the tightening cycle, the FOMC can not be sure that it has done enough to curb inflation expectations and restore the credibility of its policy stance.  

The Q2 GDP data and the ever-approaching mid-term elections will also have to enter into the Fed's thinking in the coming weeks.  There are two more FOMC meetings, plus an early look at Q3 GDP data and three more CPI reports, between now and the mid-terms. President Biden will no doubt be looking at the data flow just as closely as the FOMC as November draws closer.