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The markets and many economists expect the Federal Reserve to keep interest rates unchanged this week while keeping the door open for a hike as soon as the next meeting in July — a “hawkish pause” that some Fed officials are calling a “skip.”
“We expect there to be close to full consensus to pause in June, but be very open to hiking in July and beyond if inflation progress is not satisfactory,” said Steve Englander, head of North America macro strategy at Standard Chartered Bank, summing up the mainstream view.
Fed policymakers meet every six weeks to map interest-rate policy. This would be the first Fed meeting without a hike in the policy interest rate since March 2022.
“Inflation clearly remains too high for the FOMC’s collective comfort, and regardless of whether or not they raise the funds rate this week, the Committee faces a communications challenge as they look to reinforce the following two points — they are not necessarily done raising the funds rate, and they are a long way from cutting the funds rate,” Richard Moody, chief economist at Regions Financial Corp, said.
And there are some key questions: Will the Fed nail down expectations of another hike or try to keep more optionality? Will the central bank reinforce that this is a “skip?” And will the divisions within the Fed be seen?
Here’s a guide to what to look for.
Raising the terminal 2023 dot
The clearest way for the Fed to communicate a “hawkish pause” would be to pencil in another interest rate hike this year in its forecasts.
In March, the Fed’s “dot plot” forecast for interest rates showed the final rate hike would bring the benchmark rate to a range of 5%-5.25%. That’s where rates are now. In March, seven of the 18 Fed officials saw further rate hikes this year as being appropriate.
“We believe the median ‘dot’ for year-end 2023 will shift up by 25 basis points relative to the March dot plot,” said Sam Bullard, senior economist at Wells Fargo. Bullard said he thinks the Fed will raise rates one more time in this cycle.
Economists will be watching the dispersion of dots for a gauge of the division among officials.
Hawkish dissent?
Another way to signal that the committee is leaning to raise rates again would be if one of the policy hawks on the committee dissented. Attention will be on three voting members: Fed Governors Michelle Bowman and Christopher Waller; and Dallas Fed President Lorie Logan. Last month, Logan said the economic data didn’t justify pausing rate hikes yet.
Change the statement
At their meeting in May, Fed officials removed key language that said they anticipated more rate hikes.
They replaced it with new language, saying that they would carefully monitor the economy and assess the impact of all their rate hikes over the past year.
Krishna Guha, vice chairman of Evercore ISI, said the Fed may try to “underline an ongoing tightening bias” in a nod to the hawks.
Other economists have said Fed Chairman Jerome Powell’s opening statement at his press conference is not the prime vehicle for Fed communication, trumping the formal statement.
Change their inflation forecast
Another way to signal the Fed is still leaning toward raising interest rates again would be for the central bank to raise its inflation forecast.
As Moody noted, “Inflation clearly remains too high for the FOMC’s collective comfort.”
And Guha wrote that one way to get attention is to pencil in a “hot end-2023 inflation projection.
In March, the Fed forecast inflation, as measured by its favorite personal consumption expenditure index, would fall to a 3.3% annual rate by the end of the year, from 4.4% in April.
Read: The Fed’s crystal ball on inflation might need a fix
No major changes would be dovish signal
Luke Tilley, chief economist of Wilmington Trust, didn’t think the Fed will make any hawkish tweaks to its interest rate dot plot chart, statement, or forecast. Tilley told MarketWatch that the Fed is done hiking rates, and will lower its benchmark rate by the end of the year.
The next two consumer-inflation reports are going to bring headline consumer inflation down close to 3.5%, Tilley said, which will keep the Fed on hold until they cut rates at the end of the year.
“Inflation is going to be much lower and the economy already is much lower than the growth that caused inflation and long-run inflation expectations are in check,” Tilley said.
He said he thinks the Fed will decide at year-end that the benchmark rate should be nearer 4.25% than 5.25%.
“That is still pressing on the brake. But I think conditions will be such that they need to take the foot a little bit off the brake by the end of the year,” he said.
On the other hand, some economists think the Fed might decide to raise interest rates this week.
Read: Fed might hike interest rates in June, instead of a ‘skip’
Market view: Over 60% chance of rate hike in July
May’s consumer price inflation data, released Tuesday, showed improving headline inflation and sticky core prices. In the wake of the report, which was in line with consensus, traders in the derivatives market see only a 3% chance of a rate hike on Wednesday, down from over 20%. They moved up the odds of a hike in July at over 60% from 50% and some traders even priced in the small chance of a 50 basis point hike.
The yield for the 10-year Treasury note
TMUBMUSD10Y,
has risen to 3.76%. The S&P 500 index
SPX,
was up 23 points after the CPI data.
“Core service prices, while showing early signs of decelerating, are still moving up too fast for the Fed. To draw comfort on this key element of inflation, monetary policymakers will want to see continuation of recent evidence that the labor market is starting to cool,” said Josh Shapiro, chief U.S. economist at MFR Inc.
