SGOV - The Fed Takes A Breather But Remains Hawkish
2023-06-15 22:35:00 ET
Summary
- At its June meeting, the Federal Reserve held rates steady after 10 straight hikes but maintained a hawkish tilt.
- The committee unanimously left the federal funds rate at a range of 5.00 to 5.25%, but interestingly, significantly adjusted previous economic forecasts.
- Chairman Jerome Powell stressed that the committee would be data-dependent going forward but refused to categorize the decision as a skip, reiterating that the July Fed meeting is “live.”.
By Olumide Owolabi
At its June meeting, the Federal Reserve held rates steady after 10 straight hikes but maintained a hawkish tilt.
At the much-anticipated Federal Reserve meeting, the Federal Open Market Committee held rates steady after 10 straight increases and delivered a mostly unchanged statement but surprised the market with hawkish economic and interest rate projections.
The committee unanimously left the federal funds rate at a range of 5.00 to 5.25%, but interestingly, significantly adjusted previous economic forecasts. When compared to March projections, the June Summary of Economic Projections showed higher GDP growth (moved from +0.4% to +1.0%), a lower unemployment rate (from +4.5% to +4.1%), and higher core inflation (from +3.6% to +3.9%).
The hawkish tone was strengthened by the interest rate projections implied by the “dot plot” showing a 2023 funds rate of 5.625% (up 50bps), a 2024 funds rate of 4.625% (up 25bps) and 2025 funds rate of 3.625% (up 25bps) while the long-run estimates were left unchanged.
Chairman Jerome Powell stressed that the committee would be data-dependent going forward but refused to categorize the decision as a skip, reiterating that the July Fed meeting is “live.”
Combined with the FOMC statement, which indicates that the policy rate was held steady "to allow the committee to assess additional information and its implications for monetary policy," we think the upcoming June payroll report and CPI data to be released in early July will be key inputs for the July FOMC meeting.
We continue to believe that the fed funds rate is at its peak and are not fully convinced that the Fed will reach the 5.50 to 5.75% projected terminal policy rate. Though our base case is for rates to stay at higher levels for longer, we are less optimistic that the economy will continue at an above-trend growth rate.
The lagged effects from the cumulative 500bps of monetary tightening, as well as the impact of still-evolving banking turmoil on growth, inflation and financial conditions, are far from clear and as such we expect the committee to continue to strike a compromise between keeping policy optionality and hawkish projections to deliver a soft landing.
Overall, we think the committee has managed to maintain optionality around future meetings and has prepared the market for two-way risk. As a result, we continue to expect rates to remain range bound in the near to medium term.
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The Fed Takes A Breather But Remains Hawkish