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Sunday, March 19, 2023

FOMC Preview: Uncertainty, Likely 25bp Hike, Maybe Pause

by Calculated Risk on 3/19/2023 11:48:00 AM

There is uncertainty regarding FOMC policy this month due to the banking issues.  Just two weeks ago, the debate appeared to be between a 25bp hike and a 50 bp hike at the March meeting.  On March 7th, Fed Chair Powell said:

… the latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated. If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.
emphasis added
However, expectations are now that the FOMC will announce a 25bp rate increase in the federal funds rate at the FOMC meeting this week, and they might even pause.

Nick Timiraos reviews the Fed's situation at the WSJ: Fed’s Rate Path In Question After Silicon Valley Bank Collapse

On the meeting this week from BofA:
"[W]e look for the Fed to raise its target range for the federal funds rate by 25bp to 4.75-5.0%. The recent market turbulence stemming from distress in several regional banks certainly calls for more caution ... In the absence of further events, policymakers are likely to conclude that inflation stability remains a key monetary policy priority and, given that the economic data point to real side resilience and inflation persistence, a view a 25bp rate hike is warranted. Forward guidance, however, is likely to be somewhat dovish, highlighting the emergence of downside risk to the outlook and the policy rate path."
emphasis added
Projections will be released at this meeting. For review, here are the December projections.  Since the last projections were released, the economy has performed better than the FOMC expected, and inflation was close to expectations (after revisions).

The BEA reported real GDP was above the December projections for 2022.  And GDP tracking estimates show decent growth in Q1 (although there is a wide range of estimates).  GDP projections for 2023 will likely be revised up.

GDP projections of Federal Reserve Governors and Reserve Bank presidents, Change in Real GDP1
Projection Date202320242025
Dec 20220.4 to 1.01.3 to 2.01.6 to 2.0
1 Projections of change in real GDP and inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated.

The unemployment rate was at 3.6% in February, just above the 50-year low. The FOMC has been criticized for projecting a significant employment recession this year, and they will probably revise down their projected unemployment rate for Q4 2023.

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents, Unemployment Rate2
Projection Date202320242025
Dec 20224.4 to 4.74.3 to 4.84.0 to 4.7
2 Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

As of January 2023, PCE inflation was up 5.4% year-over-year from January 2022, and, in general, inflation has been close to expectations.  However, after accounting for the unusual dynamics related to the pandemic, inflation is likely lower than expected.  The FOMC will likely leave their inflation projections mostly unchanged.

Inflation projections of Federal Reserve Governors and Reserve Bank presidents, PCE Inflation1
Projection Date202320242025
Dec 20222.9 to 3.52.3 to 2.72.0 to 2.2

PCE core inflation was up 4.7% in January year-over-year. 

Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents, Core Inflation1
Projection Date202320242025
Dec 20223.2 to 3.72.3 to 2.72.0 to 2.2