June Fed Meeting: FOMC Leaves Rates Unchanged For The First Since March 2022

After 10 consecutive interest rate hikes, the Federal Reserve took a breather at the June meeting.

The Fed’s central committee, the Federal Open Markets Committee, decided to leave the federal funds target rate unchanged at a range of 5.0% to 5.25%. The June pause marks the first policy meeting at which the FOMC has not raised interest rates since it began its monetary policy tightening cycle in March 2022.

The Fed confirmed that it would continue to allow up to $60 billion in Treasury securities and $35 billion in agency mortgage-backed securities (MBS) to roll off its $8.3 trillion balance sheet each month. This policy of so-called quantitative tightening has been an important part of the central bank’s ongoing war against inflation.

The FOMC has been fighting record-high U.S. inflation that took off during the Covid-19 pandemic. A combination of interest rate hikes, slowing economic growth and a tightening credit market has helped cool off price gains, although experts agree that the job is not quite complete.

“[The Fed] should make it clear that the battle’s not over, though the fiercest fighting seems to be,” said Sean Snaith, director of the University of Central Florida’s Institute for Economic Forecasting. “Now, it’s more of a mop-up operation to get these final few points off the inflation rate to hit the 2% target.”

At his post-decision press conference, Fed Chair Jerome Powell acknowledged as much.

“In light of how far we’ve come in tightening policy, the uncertain lags with which monetary policy affects the economy and potential headwinds from credit tightening, today we decided to leave our policy interest rate unchanged and to continue to reduce our securities holdings,” said Powell.

The FOMC now appears to believe its 2% long-term inflation target is in sight, but the June pause may not necessarily mean the Fed has issued its final rate hike of the cycle. 

The Inflation Tightrope

Over the last 14 months, the Fed has been trying to bring down inflation by raising interest rates without tipping the U.S. economy into a recession. Navigating this sort of “soft landing” for the economy may prove difficult, because higher interest rates increase borrowing costs for both companies and consumers, slowing economic activity.

This week, the Labor Department reported the consumer price index (CPI) rose at an annual rate of 4.1% in May, down from the 4.9% annual gain in April and the 40-year high of 9.1% in June 2022.

Later in the month, the Commerce Department reported that the core personal consumption expenditures price index was up 4.7% in April, up slightly from a 4.6% year-over-year gain in March—but well off the 2022 peak of 5.3%. So-called core PCE is the Fed’s preferred measure of inflation, and its long-term target for core PCE inflation is just 2%.

“Despite elevated inflation, longer-term inflation expectations appear to remain well-anchored, as reflected in surveys of households, businesses, and forecasters, as well as measures from financial markets,” said Powell.

Meanwhile, the U.S. labor market has remained tight, making the FOMC’s fight against inflation more difficult. The Labor Department reported the U.S. economy added 339,000 jobs in May, exceeding economist expectations of 190,000 new jobs. The Labor Department reported U.S. wages were up 4.3% year-over-year. The unemployment rate ticked higher to 3.7% in May but remains near 50-year lows.

“Looking ahead, nearly all committee participants view it as likely that some further rate increases will be appropriate this year to bring inflation down to 2% over time,” Powell said.

U.S. Economic Outlook

In addition to its monetary policy decision, the Fed updated its long-term economic projections on Wednesday. Committee members now estimate a median fed funds rate of 5.6% in 2023, up from their previous 5.1% projection back in March. The new projections suggest two additional interest rate hikes by the end of 2023.

The Fed’s “dot plot” depiction of individual members’ interest rate expectations suggests the Fed will not pivot from rate hikes to rate cuts until 2024.

The committee projects a 2023 U.S. unemployment rate of 4.1%, down from 4.5% in March. Fed members increased their 2023 U.S. gross domestic product (GDP) growth projection from 0.4% to 1%. The Federal Reserve also cut its 2024 GDP growth projection from 1.2% to 1.1%.

On the inflation front, the Fed’s projected 2023 core PCE inflation growth rate jumped from 3.6% to 3.9%.

Economists have been concerned throughout 2023 that it will be difficult for the Fed to get inflation under control without triggering a recession. However, the S&P 500 is up 14.5% year-to-date and officially entered bull market territory in early June, surpassing a 20% gain from its October 2022 lows. Stock prices initially fell on Wednesday following the FOMC announcement.

Chris Zaccarelli, chief investment officer at Independent Advisor Alliance, says the FOMC’s job is not yet complete.

“We are stuck in no-man’s land where inflation is above target, monetary policy is tight and employers hoard labor,” Zaccarelli says. “We think the longer this persists—effectively a ‘no landing’—the more likely a hard landing scenario becomes because either the Fed will eventually resume raising rates or the economy will eventually run out of steam and we will fall into an old-fashioned recession.”

What’s Next for the Fed?

According to CME Group, markets are currently pricing in a 61.4% chance the Fed will issue one final interest rate hike of at least a quarter of a percentage point at its next meeting on July 26. However, investors and central bankers have roughly six weeks of economic data to monitor between now and then that could have a significant impact on monetary policy.

Bill Adams, chief economist for Comerica Bank, says investors still aren’t convinced the FOMC has issued its final rate hike of 2023.

“The faster inflation comes down, the earlier the Fed can take their foot off the brake, and the sooner economic growth can pick up again,” Adams says. “A hike in July or September isn’t in our baseline forecast but is quite possible if the next jobs report or CPI report come in hotter than expected.”

In the near term, investors will be watching for the May core PCE reading on June 30 to confirm inflation is still trending lower heading into July. In addition, the FOMC will release the minutes from its June meeting on July 5, which could shed further light on what factors committee members have been considering and discussing in weighing their monetary policy decisions.

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