Preparing for the next step
The Fed skipped a rate hike but suggested more could come.
By unanimous vote, the Federal Reserve kept the fed funds rate in a range of 5-5.25% today, meeting market expectations for no hike after 10 straight increases dating back to March of last year. But this was clearly a hawkish skip. Indicated in their “dot plot,” Fed policymakers forecast the median rate at year-end to be 5.6%, compared to the projection of 5.1% a little more than a month ago. Twelve of 18 Federal Open Market Committee (FOMC) members now anticipate at least two more 25 basis-point hikes this year.
Elsewhere in the Summary of Economic Projections, the median unemployment rate forecast was revised down from 4.5% to 4.1% by the end of 2023, while the core inflation rate was revised up from 3.6% to 3.9%, providing the rationale for two more hikes this year. Because monetary policy works with a lag, the pause from hiking rates is designed to give the Fed time to judge whether or not the fastest tightening cycle in 40 years (and concurrent balance sheet shrinkage) is sufficiently restrictive to dampen aggregate demand and restrain inflation. The dot plot, however, suggests that most FOMC members believe a bit more tightening may be necessary to return inflation to their 2% target, though it would depend on inflation and labor market data.
In his press conference, Chair Jerome Powell said inflation risks are still to the upside and that the process of getting it down to target “will be a gradual one.” Powell is determined to reclaim the Fed’s inflation-fighting credibility that was damaged when they incorrectly gauged inflation to be transitory after the Covid recession. He strongly stated that the committee “will do whatever it takes to get inflation down,” as “price stability is the bedrock of the U.S. economy.”
Powell was careful to emphasize that no decision was made on a July hike, but he did say it is a live meeting, leading the market to increase the probability of a move. Powell said rate cuts will be a couple of years out, a position at odds with the dot plot forecast of 100 basis points of cuts in 2024.