The Fed said that pausing the rate hike allows the Fed to assess future information and its impact, and reiterated that the banking system is resilient and the tightening credit environment has an uncertain impact on inflation. The dot plot shows that two-thirds of Fed officials expect rates to be above 5.5% this year, meaning at least two 25 basis point rate hikes. Fed officials raised the expected median peak rate by 50 basis points to 5.6% and raised this year's GDP growth forecast by more than double to 1%, lowered the unemployment rate forecast for this and the next two years, and raised the core PCE inflation forecast for this year.
As expected by the market, the Federal Reserve has finally stopped raising interest rates, but has released a hawkish signal: implying in the dot plot and economic outlook that there may be two more rate hikes this year; the Fed has raised its peak rate expectations, higher than most economists and investors expected.
On Wednesday, June 14, Eastern Time, the Federal Open Market Committee (FOMC) of the Federal Reserve announced after its monetary policy meeting that it would maintain the target range for the federal funds rate at 5.0% to 5.25%, keeping this policy rate at its highest level in sixteen years. Like the previous seven meetings since July last year, this rate decision received unanimous support from FOMC voting members.
This is the first pause in the Fed's current rate hike cycle. Since March last year, the Fed has raised interest rates at ten consecutive meetings and announced a 25 basis point rate hike at three consecutive meetings this year until May.
The Fed's rate decision this time is in line with market consensus expectations. After the release of the US May CPI on Tuesday, which slowed down more than expected year-on-year and hit the lowest growth rate in more than two years, the probability of the Fed pausing its rate hike this week soared to over 90%.
After the CPI was announced, Nick Timiraos, a journalist known as the "Fed's mouthpiece" and the "new Fed News Agency," wrote on Tuesday that overall inflation slowed down in May, but potential price pressures remained strong. Although the Fed is expected to remain unchanged this week, concerns about inflation may still prompt Fed officials to hint at preparing to restart rate hikes within this year. They may raise rate expectations in the economic outlook to emphasize rate hike expectations.
After the announcement of the decision, expectations of a Fed rate cut this year cooled among bond traders. Swap contract pricing shows that traders currently expect the policy rate in December to be around 5.23%, about 9 basis points lower than the peak of 5.32% in September, while the expected rate in December before the Fed's announcement on Wednesday was about 15 basis points lower than the expected peak.
Pausing rate hikes allows the Fed to evaluate future information and its impact, and reiterates that it is prepared to adjust its policy stance if necessary
Compared with the statement after the May meeting, the biggest change in the Fed's decision statement after this meeting is the addition of a sentence in the forward guidance on interest rates:
The Committee judges that it is appropriate to maintain the target range for the federal funds rate at this level and let the Committee assess the incoming information on the economy's progress toward its objectives of maximum employment and 2 percent inflation.
The sentence "The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal" in the March and May statements was deleted.
This time, the Fed basically maintained the same language as in May, stating that:
"In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments." "
Meanwhile, the statement reiterated the wording added in March's statement: "The Committee will closely monitor future releases of information and assess their impact on monetary policy." This statement continues to reiterate that if there are risks that may hinder the Fed from achieving its inflation target, it is prepared to adjust its policy stance appropriately, and reiterates last year's June statement that it is "strongly committed to bringing the inflation rate back to the 2% target."
Dot plot shows two-thirds of Fed officials expect at least two 25bp rate hikes this year, with peak rate expectations raised by 50bp
The dot plot of future interest rate levels released after this meeting shows that compared to the dot plot released in March, this time the Fed decision-makers have higher expectations for the peak interest rate, which means greater and more hawkish tightening.
Among the 18 Fed officials who provided interest rate forecasts, two of them expected the current level to be in the range of 5.0% to 5.25%, with a total of 16 people expecting the rate to be above 5.25% by the end of this year. In the dot plot released in March, only seven people expected it to be above 5.25%.
In the March dot plot, only seven Fed officials expected rates to rise above 5.5% this year, while this time 12 people made such predictions, accounting for two-thirds of the total and about 67%. Among these 12 people, nine expected rates to be between 5.5% and 5.75%, which means there will be two more 25bp rate hikes. The other three people expected more rate hikes, with two of them expecting rates to be between 5.75% and 6.0%, and one even expecting rates to be above 6.0%.
In the March dot plot, only one person expected rates to be between 5.75% and 6.0% this year, three people expected rates to be between 5.25% and 5.5%, and three people expected rates to be between 5.5% and 5.75%, with no one expecting rates to exceed 6.0%.
In the economic outlook released after this meeting, Fed officials raised the median interest rate forecast for the next three years across the board, with the peak rate forecast for this year raised by 50bp compared to the previous forecast level.
Based on the peak interest rate and the majority of officials' expected levels in the dot plot, Fed decision-makers are hinting that even if there is no rate hike this week, the Fed will restart rate hikes this year, with two more 25bp rate hikes if one rate hike occurs.
Fed officials' interest rate forecasts for this year and beyond are:
- The federal funds rate at the end of 2023 is 5.6%, compared to the March forecast of 5.1%.
- The federal funds rate at the end of 2024 is 4.6%, up 30bp from the March forecast of 4.3%.
- The expected federal funds rate for 2025 is 3.4%, which is 30 basis points higher than the expected 3.1% in March.
- The expected long-term federal funds rate after that is 2.5%, the same as the March expectation.
This year's GDP growth rate is expected to be raised by more than double to 1%, and the unemployment rate expectation for the next three years is lowered. The core PCE inflation expectation for this year is raised.
The updated economic outlook released this time shows that no Fed official expects the US to fall into an economic recession this year.
In the economic outlook, Fed officials significantly raised their US GDP growth expectations for this year, slightly lowered their GDP expectations for the next two years, lowered their unemployment rate expectations for the next three years, and slightly lowered their personal consumption expenditure price index (PCE) inflation expectations for this year, while raising their core PCE inflation expectations for this year:
- It is expected that the GDP growth rate in 2023 will be 1.0%, more than twice the expected growth rate of 0.4% in March. The expected GDP growth rate in 2024 is 1.1%, slightly lower than the expected growth rate of 1.2% in March. The expected growth rate for 2025 was lowered from the expected 1.9% in March to 1.8%, and the longer-term expected growth rate remained the same as in March, at 1.8%.
- The expected unemployment rate for 2023 was lowered from the expected 4.5% in March to 4.1%, and the expected rates for 2024 and 2025 were both lowered from 4.6% in March to 4.5%. The longer-term unemployment rate expectation remained the same as in March, at 4.0%.
- The expected PCE inflation rate for 2023 was lowered from the expected 3.3% in March to 3.2%, and the expected rates for 2024 and 2025 remained the same as in March, at 2.5% and 2.1%, respectively. The longer-term expected rate remained the same as in March, at 2.0%.
- The expected core PCE for 2023 was raised from the expected 3.6% in March to 3.9%, and the expected rates for 2024 and 2025 remained the same as in March, at 2.6% and 2.1%, respectively.
Continue to emphasize the resilience of the banking system and 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 US banking system in this statement is exactly the same as in May's statement, reiterating the March statement that "the US banking system is sound and resilient," and reiterating May's statement that "a tighter credit environment for households and businesses may put pressure on economic activity, hiring, and inflation." The extent of these impacts is uncertain."
At the same time, this statement continues to reaffirm the language added in May of last year, stating that the FOMC "remains highly concerned about inflation risks."
In assessing the economy, this statement retains the language from May that "job gains have been strong in recent months, and the unemployment rate has stayed low. Inflation has been running high."
The only modification is that this statement states: "Recent indicators show that economic activity continues to expand at a moderate pace," while the May statement said: "In the first quarter, economic activity expanded at a moderate pace."
In May of last year, the Fed announced its plan to reduce its balance sheet (tapering), reducing bond holdings starting on June 1st, initially reducing up to $30 billion in US Treasuries and $17.5 billion in agency mortgage-backed securities (MBS) per month, with the maximum monthly reduction increasing by twice after three months.
Like the previous eight meetings, this meeting's statement did not reiterate the above plan, but instead stated that it will continue to reduce holdings of Treasury, agency debt, and agency MBS according to the previously announced tapering plan.