A Rate Pause Was Expected and Delivered Unanimously by the FOMC
June 14, 2023
The federal funds rate target will remain at 5.00-5.25%. This was the first FOMC meeting to end without a rate hike since the tightening cycle began in March 2022. Economic conditions haven’t changed since the previous FOMC rate announcement on May 3: modest GDP growth, robust job gains, a lower unemployment rate than would be consistent with longer-term price stability, and elevated inflation. Balance sheet reduction is to continue as described previously. The justifications for the paused tightening are to allow officials to assess additional information given the considerable cumulative tightening in the pipeline, the lags with which policy changes affect activity and inflation, and future developments in the economy and financial markets. Returning inflation to its 2% target remains the North Star guiding future.
Highlights of forecast updates are
- The growth projection for 2023 was more than doubled to 1.0%, but the 2024 and 2025 forecasts were lowered marginally.
- The end-2023 unemployment rate forecast was lowered to 4.1% from 4.5% and by 0.1 percentage point each in 2024 and 2025 to 4.5%.
- Total PCE price inflation is seen ending 2023 0.1 percentage point lower than imagined earlier at 3.2%, but core inflation was bumped higher to 3.9% likely at end-2023. No changes were made to the 2024 inflation forecasts, and only a 0.1 percentage point upward revision of core PCE was made regarding 2025.
- The federal funds rate expectations was raised by a half percentage point at end-2023, implying two 25-basis point hikes or one 50-bp increase over the second half of this year. The rate then is perceived likely to drop a full percentage point in 2024 and by 125 bps in 2025.
Chairman Powell’s press conference sent a nuanced message. While Fed officials felt it would be appropriate to pause at this meeting, they are more convinced than before that the rate will need to go higher and project that the fed funds rate at the end of this year will be 50 basis points higher than now. There is continuing concern that core inflation, which is running close to 5%, is not as low as they expected it to be at this point. The dot-plot estimate projects core inflation at 3.9% by the end of this year and would need additional monetary tightening in order for that to happen. Powell was vague about the time of the two 25-bp rate cuts in the rest of this year, but core inflation and labor cost increases are likely to be the main guides. Another area to watch is the impact on monetary conditions of the bank failures earlier this year. That is not apparent yet but ought become so in coming months.
Copyright 2023, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
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