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Sunday, June 11, 2023

FOMC Preview: A Likely "Pause"

by Calculated Risk on 6/11/2023 08:11:00 AM

Most analysts expect the FOMC to "pause" raising rates at the meeting this week.  

In May, the wording of the FOMC statement suggested a likely pause in rate hikes at the June meeting this coming week, since the FOMC assessed the cumulative effects of previous rate hikes and the possible impact of tighter lending due to issues in the banking system:
"In determining the extent to which additional policy firming may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments."
On the meeting this week from BofA:
"We expect the Fed to maintain the target range for the federal funds rate at 5.0-5.25% at the June FOMC meeting, while it assesses monetary policy lags and bank stress. That said, a skip is not the same as a prolonged pause. With the debt limit increased and bank stress relatively stable - it may not be getting much better, but it also does not appear to be getting much worse - the Fed's primary concern remains inflation and it will be reluctant to say definitively that the hiking cycle is over. Hence, we expect the Fed to retain upward bias in its projected policy rate path and we look for the median FOMC member to forecast one additional 25bp rate hike by year-end, for a terminal target range of 5.25-5.50%. In addition, we think the median forecast for year-end 2024 will rise by 37.5bp to 4.5-4.75%, signaling increased willingness to maintain a "higher-for-longer" policy stance to bring inflation down with greater confidence."
emphasis added
And from Goldman Sachs economists:
The FOMC is likely to pause at its June meeting next week to let the haze clear before it considers another rate hike. The Fed leadership has signaled that it sees pausing as the prudent course because uncertainty about both the lagged effects of the rate hikes it has already delivered and the impact of tighter bank credit increases the risk of accidentally overtightening. ... We expect the median dot to show one additional hike to a new peak of 5.25-5.5%, in line with our own forecast.
Projections will be released at this meeting. For review, here are the March projections.  Since the last projections were released, the economy has performed better than the FOMC expected, and inflation was slightly above expectations.

The BEA reported real GDP increased at a 1.3% annual rate in Q1, and most analysts expect further upward revisions. Tracking estimates suggest Q2 GDP will be in the 1% to 2% range.  The FOMC will most likely upgrade their growth projection for Q4 2023.

GDP projections of Federal Reserve Governors and Reserve Bank presidents, Change in Real GDP1
Projection Date202320242025
Mar 20230.0 to 0.81.0 to 1.51.7 to 2.1
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 3.7% in May. To reach the mid-point of the FOMC projections for Q4 2023, the economy would likely have to lose over 1 million jobs by Q4.   The FOMC will likely lower their unemployment rate projection for Q4.

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents, Unemployment Rate2
Projection Date202320242025
Mar 20234.0 to 4.74.3 to 4.94.3 to 4.8
2 Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

As of April 2023, PCE inflation increased 4.4 percent year-over-year (YoY), up from 4.2 percent YoY in March, and down from the recent peak of 7.0 percent in June 2022.  The projection of PCE inflation for Q4 2023 will might be revised up slightly, however May and June 2022 PCE inflation was very high, and YoY PCE inflation will likely decrease sharply over the next two months.

Inflation projections of Federal Reserve Governors and Reserve Bank presidents, PCE Inflation1
Projection Date202320242025
Mar 20233.0 to 3.82.2 to 2.82.0 to 2.2

PCE core inflation increased 4.7 percent YoY, up from 4.6 percent in March, and down from the recent peak of 5.4 percent in February 2022.; This remains a concern for the FOMC, however this includes shelter that was up 8.4% YoY in April (even though asking rents are mostly unchanged YoY). 

The projection for Q4 core PCE inflation will likely be revised up.

Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents, Core Inflation1
Projection Date202320242025
Mar 20233.5 to 3.92.3 to 2.82.0 to 2.2