Yesterday, the FOMC left rates unchanged, maintaining the federal funds target range at 5–5.25%, in line with market expectations. This follows consecutive rate hikes at the previous 10 meetings. Beyond the policy decision itself, the Federal Reserve communicated its intentions for future policy via the FOMC statement, the Summary of Economic Projections, and Fed Chair Jerome Powell's news conference.
The FOMC statement showed little change in its forward guidance, maintaining most of the language adopted in March. In determining the extent of "additional policy firming" appropriate to return inflation to 2%, the committee will "take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments."
In the Summary of Economic Projections, forecasts for 4Q23 GDP growth and core inflation were revised higher, and the unemployment rate revised lower. The dot plot showed the median end-2023 dot at 5.6%, 50 basis points higher than in March, with only two of the 18 dots calling for no additional hikes. This strongly suggests that the Fed will implement additional rate hikes unless the economic data softens in the near future. Economic forecasts for 2024 were little changed, so the Fed is basically saying that they need higher rates in the near term to bring the economy, and inflation, back to the path they were projecting in March. The end-2024 median dot went up by 25 basis points to 4.6%, which demonstrates the Fed's willingness to start cutting rates next year if inflation slows in line with their forecast, which has core PCE inflation at 2.6% in 4Q24 versus the current 4.7%.
In the post-meeting press conference, Powell reiterated the Fed's strong commitment to bringing inflation down to the 2% target. He said that the committee left rates unchanged at this meeting to give themselves additional time to gather information, assess the impact of banking turmoil, and give the economy more time to adapt to the tightening implemented so far. He described the decision to leave rates unchanged as a further moderation in the pace of hikes, which is appropriate given that they are now closer to the terminal rate.
Our base case calls for the Fed to hike 25 basis points at its next meeting on 25–26 July.
Main contributor - Brian Rose
Content is a product of the Chief Investment Office (CIO).
Original report - No hike this time, 15 June 2023.