The US Federal Reserve still managed to surprise markets despite leaving interest rates unchanged as expected Wednesday: the accompanying statement made clear the bank would “assess the implications for monetary policy” following its yearlong campaign to bring down runaway inflation. And although a pause in the hiking cycle was heavily priced in, the updated staff fed fund rate projections pointed to a higher terminal rate.
The FOMC, the US central bank’s rate setting committee, voted unanimously to keep policy on hold and in a range of 5.0-5.25% but left investors in no doubt it would restart its hiking cycle at the July meeting, should inflation remain high.
Much of the communique echoed comments from the previous rate decision, but revisions to the dot plot (a chart showing estimates for future fed funds rate) led analysts to frame the decision as a “hawkish hold”.
Daiwa Capital Markets’ Lawrence Werther opined that the press briefing was not especially enlightening. “Some reporters pressed Chair Powell on the merits of a pause versus just raising rates to the desired level, while others questioned him about potential sources of disinflation. The Fed Chair mostly stuck to the script, arguing that a pause was just part of the progression (speed) of rate shifts, tapering from large increases (75 basis points) and moderating over time.”
Adjusted projections
As is the norm with this quarterly event, Fed staff adjusted economic projections and updated the dot plot.
The latest report included an upward revision of GDP growth to 1.0% from 0.4% in March, with the Fed now expecting modestly slower activity over the two-year forecast horizon.
There was a slight downward adjustment to the unemployment rate to 4.1% from 4.5% for this year, with it expected to return to the mid-4% range two years out.
Staff now foresee headline PCE inflation slipping a tenth from March projections to 3.2%, with the core measure revised higher to 3.9% from 3.6%.
“The data in total suggested the need for a somewhat more forceful policy response than previously anticipated,” Werther noted.
The median expected interest rate for 2023 in the new dot plot was lifted to 5.625% at the end of the year from 5.125% previously, with 12 of 18 dots at or above the median. The new projected target is now at6.125% versus 5.875% in March. The median for 2024 was revised higherto4.625% versus 4.250%.
What was the point in skipping?
JP Morgan’s Micheal Feroli critiqued the outcome of the meeting, noting that it was hawkish, and peculiar: “While the committee unanimously voted to leave rates unchanged, a large majority of FOMC participants anticipate at least two more rate hikes this year, and only two see the current setting as the appropriate terminal rate. So why not just go ahead and hike today?
“Chair Powell said it was a continuation of the process of slowing down the speed of hikes. He tried not to tip his hand on July but given how many on his committee are inclined to hike multiple times this year, it may be hard to get them to pause for more than one meeting.”
Barclays’ Marc Giannoni and his team said they expect the FOMC to hike another 25bp in July, and then again in September, bringing the funds rate target range to 5.50-5.75%. “While we have a lot of conviction at this point about a July hike, we could easily see the September hike replaced with a November increase. We then expect the FOMC to pause and maintain this range through Q2 2024,” he explained.
“For 2024, though, we revise our rate path slightly to reflect cuts starting in June as opposed to May.”
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- FOMC votes unanimously to leave rates at 5.0-5.25%
- Committee will assess effectiveness of past hikes
- Fed Chair Powell says inflation pressures still high
- Dot plot predicts at least two more hikes this year
By Harry Daniels
LiveSquawk News
@HarryDaniels71
15 June 2023 | 14:30 GMT
The US Federal Reserve still managed to surprise markets despite leaving interest rates unchanged as expected Wednesday: the accompanying statement made clear the bank would “assess the implications for monetary policy” following its yearlong campaign to bring down runaway inflation. And although a pause in the hiking cycle was heavily priced in, the updated staff fed fund rate projections pointed to a higher terminal rate.
The FOMC, the US central bank’s rate setting committee, voted unanimously to keep policy on hold and in a range of 5.0-5.25% but left investors in no doubt it would restart its hiking cycle at the July meeting, should inflation remain high.
Much of the communique echoed comments from the previous rate decision, but revisions to the dot plot (a chart showing estimates for future fed funds rate) led analysts to frame the decision as a “hawkish hold”.
Daiwa Capital Markets’ Lawrence Werther opined that the press briefing was not especially enlightening. “Some reporters pressed Chair Powell on the merits of a pause versus just raising rates to the desired level, while others questioned him about potential sources of disinflation. The Fed Chair mostly stuck to the script, arguing that a pause was just part of the progression (speed) of rate shifts, tapering from large increases (75 basis points) and moderating over time.”
As is the norm with this quarterly event, Fed staff adjusted economic projections and updated the dot plot.
The latest report included an upward revision of GDP growth to 1.0% from 0.4% in March, with the Fed now expecting modestly slower activity over the two-year forecast horizon.
There was a slight downward adjustment to the unemployment rate to 4.1% from 4.5% for this year, with it expected to return to the mid-4% range two years out.
Staff now foresee headline PCE inflation slipping a tenth from March projections to 3.2%, with the core measure revised higher to 3.9% from 3.6%.
“The data in total suggested the need for a somewhat more forceful policy response than previously anticipated,” Werther noted.
The median expected interest rate for 2023 in the new dot plot was lifted to 5.625% at the end of the year from 5.125% previously, with 12 of 18 dots at or above the median. The new projected target is now at 6.125% versus 5.875% in March. The median for 2024 was revised higher to 4.625% versus 4.250%.
JP Morgan’s Micheal Feroli critiqued the outcome of the meeting, noting that it was hawkish, and peculiar: “While the committee unanimously voted to leave rates unchanged, a large majority of FOMC participants anticipate at least two more rate hikes this year, and only two see the current setting as the appropriate terminal rate. So why not just go ahead and hike today?
“Chair Powell said it was a continuation of the process of slowing down the speed of hikes. He tried not to tip his hand on July but given how many on his committee are inclined to hike multiple times this year, it may be hard to get them to pause for more than one meeting.”
Barclays’ Marc Giannoni and his team said they expect the FOMC to hike another 25bp in July, and then again in September, bringing the funds rate target range to 5.50-5.75%. “While we have a lot of conviction at this point about a July hike, we could easily see the September hike replaced with a November increase. We then expect the FOMC to pause and maintain this range through Q2 2024,” he explained.
“For 2024, though, we revise our rate path slightly to reflect cuts starting in June as opposed to May.”