Suspension of interest rate hikes as scheduled but hawks! Fed signals two more more, no recession expected this year

Author: Li Dan

As expected by the market, the Federal Reserve finally stopped raising interest rates, but released a hawkish signal: in the dot plot and economic outlook, it hinted that there may be two more interest rate hikes this year; than most economists and investors expected.

Image credit: Generated by Unbounded AI tools

On Wednesday, June 14, Eastern Time, the Federal Reserve Monetary Policy Committee FOMC announced after the meeting that the target range of the federal funds rate will remain unchanged at 5.0% to 5.25%, keeping this policy rate at the highest level in 16 years. Like the previous seven meetings since July last year, this interest rate decision was unanimously approved by FOMC voting members.

This is the first time the Fed has paused in this cycle of rate hikes. Since March last year, the Federal Reserve has decided to raise interest rates in 10 consecutive meetings as of May this year, and announced 25 basis points of interest rate hikes after three consecutive meetings.

The Fed's interest rate decision was in line with market consensus expectations. After it was announced on Tuesday that the year-on-year growth rate of CPI in May in the United States slowed more than expected and hit the lowest growth rate in more than two years, the market's expectation of the Fed's pause in raising interest rates this week jumped to more than 90%.

After the announcement of the CPI, Nick Timiraos, a reporter who is regarded as the mouthpiece of the Federal Reserve and known as the "New Federal Reserve News Agency", posted on Tuesday that the overall inflation slowed down in May, but the underlying price pressure is still firm, although the Fed is expected to stay on hold this week. Concerns about inflation could still prompt Fed officials to signal readiness to resume rate hikes this year, and they could emphasize expectations for rate hikes by raising their rate forecasts in their economic outlook.

After the announcement of the Fed's decision on Wednesday, bond market traders cooled their expectations for the Fed to cut interest rates this year. Swap pricing showed traders now expect the policy rate to be around 5.23 percent in December this year, about 9 basis points below the peak of 5.32 percent reached in September, compared with the expected December rate earlier on Wednesday ahead of the Fed's decision. It was also about 15 basis points below the expected peak.

Pausing interest rate hikes allows the Fed to assess future information and its implications Reiterates readiness to adjust policy stance if needed

Compared with the last meeting statement in May, the biggest change in the Fed’s post-meeting resolution statement is the addition of a sentence in terms of forward guidance on interest rates:

The meeting left the (interest rate) target range unchanged, allowing the (FOMC) committee to assess more information and its implications for monetary policy.

This statement deleted the statement after the March and May meetings that "the committee will pay close attention to the information released in the future and assess its impact on monetary policy".

This time, the rhetoric of judging future monetary tightening mentioned in May has been slightly adjusted. "To judge the extent to which additional policy tightening may be appropriate to bring inflation back to 2 percent over time, the (FOMC) Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity, and inflation," May said. , as well as changes in economic and financial conditions.” The FOMC will have these considerations “in order to judge the level of additional policy tightening that may be appropriate to bring inflation back to 2 percent over time,” the FOMC said this time.

This statement continued to reiterate that if there is a risk that the Fed may prevent the Fed from reaching its inflation target, it is ready to adjust its policy stance appropriately if necessary, and reiterated the "strong commitment to bring inflation back to the 2% target" added to the statement in June last year. "

The dot plot shows that two-thirds of Fed officials expect at least two 25 basis point hikes this year

The Fed officials’ expected future interest rate level dot plot released after the meeting shows that, compared with the dot plot released last time in March, the Fed policymakers have higher expectations for the peak interest rate, which means that the tightening will be stronger and tighter. Hawkish.

Among the 18 Fed officials who provided interest rate forecasts, two this time expect interest rates to end this year at the current level in the range of 5.0% to 5.25%, and a total of 16 expect interest rates to be higher than 5.25% by the end of this year. In the dot plot released in March, only seven people expected it to be higher than 5.25%.

In the March dot plot, only seven Fed officials expected interest rates to be higher than 5.5% this year, while 12 of them predicted so this time, accounting for two-thirds of the total, accounting for about 67%. Nine of the 12 expected interest rates to be between 5.5% and 5.75%, which means two more 25 basis point hikes are expected. The other three forecast more rate hikes, with two forecasting rates between 5.75% and 6.0% and one even forecasting rates above 6.0%.

In the March dot plot, only one person expected the interest rate to be between 5.75% and 6.0% this year, three people expected it to be between 5.25% and 5.5%, three people predicted it to be between 5.5% and 5.75%, and no one expected it to exceed 6.0%.

In the economic outlook released after this meeting, Fed officials raised the median value of interest rate expectations for this year, next three years, among which, the peak of interest rate expectations this year has increased by 50 basis points compared with the previous forecast level.

Judging from the peak interest rate and the expected level of most officials in the dot plot, Fed policymakers are hinting that even if they do not raise interest rates this week, the Fed will restart raising interest rates this year. rate hike.

The median level of Fed officials' interest rate forecasts for this year and beyond is as follows:

• The federal funds rate at the end of 2023 is 5.6%, compared with the 5.1% expected in March.
• The federal funds rate at the end of 2024 is 4.6%, up 30 basis points from the March forecast of 4.3%.
• The federal funds rate at the end of 2025 is 3.4%, also up 30 basis points from the 3.1% expected in March.
• The longer-term federal funds rate forecast is expected to come in at 2.5 percent thereafter, unchanged from the March forecast.

This year's GDP growth rate is expected to be more than doubled to 1%, and the three-year unemployment rate is expected to be lowered. This year's core PCE inflation forecast is raised.

The updated economic outlook released this time shows that none of the Fed officials expect the United States to fall into a recession this year.

In the economic outlook, the Federal Reserve officials sharply raised the US GDP growth forecast for this year, slightly lowered the GDP forecast for the next two years, lowered the unemployment rate forecast for the next three years, and slightly lowered the personal consumption expenditure price index (PCE) inflation for this year. Expected to raise core PCE inflation expectations for this year:

• GDP expected to grow 1.0% in 2023, more than double the 0.4% expected in March, 1.1% in 2024, slightly below March's forecast of 1.2%, growth in 2025 The forecast was lowered to 1.8 percent from 1.9 percent expected in March, with the longer-term forecast unchanged from March at 1.8 percent.
• Unemployment forecasts for 2023 were cut to 4.1% from 4.5% projected in March, forecasts for both 2024 and 2025 were cut to 4.5% from 4.6%, and the longer-term unemployment forecast was unchanged from March at 4.0%.
• The 2023 PCE inflation forecast was lowered to 3.2% from 3.3% in March, and the expectations for 2024 and 2025 are unchanged from March at 2.5% and 2.1%, respectively. The longer-term forecast is also the same as in March, at 2.0%.
• The 2023 core PCE forecast was raised to 3.9% from the March forecast of 3.6%, the 2024 forecast was unchanged from March at 2.6%, and the 2025 forecast was raised to 2.2% from 2.1%.

Continue to reiterate the resilience of the banking system, continue to shrink the balance sheet according to the previous route, reiterate that the impact of tightening credit environment on inflation is uncertain

The evaluation of the U.S. banking system in this statement is exactly the same as the previous statement in May. It continues to reiterate the rhetoric in March that "the U.S. banking system is sound and resilient" and reiterates what was said in May: "It is more profitable for households and businesses." Tight credit conditions could weigh on economic activity, hiring, and inflation. The extent of these effects is uncertain."

At the same time, this statement continued to reiterate the language added to the statement in May last year, that is, the FOMC "remains highly concerned about inflation risks."

In assessing the economy, the statement retained May's rhetoric that "job growth has been strong in recent months, unemployment has remained low. Inflation has remained elevated."

Slightly revised, the statement said: "Recent indicators suggest that economic activity continued to expand at a moderate pace," while the May statement said: "Economic activity expanded at a moderate pace in the first quarter."

In May last year, the Federal Reserve announced the route to reduce its balance sheet (shrink sheet). It will reduce its bond holdings from June 1. Initially, it will reduce US Treasury bonds by up to US$30 billion and agency mortgage-backed securities (MBS) by US$17.5 billion per month. Months later, the maximum monthly reduction will be doubled.

Like the previous eight meetings, the statement of this meeting did not reiterate the above-mentioned route, but said that it will continue to reduce its holdings of treasury bonds, agency bonds and agency MBS according to the previously announced reduction route.