Investors and economists are expecting the Federal Reserve to end a string of 10 straight rate hikes on Wednesday by keeping its policy rate unchanged on Wednesday. But don’t call it a pivot or even a pause.
The Fed officials’ preferred term is “skip,” suggesting that they’ll skip a rate increase at the June meeting in order to assess the impact of the the five percentage points of tightening they’ve already done. It will also give them a chance to see if this Spring’s bank stresses will do some of the work for them.
The market expects a skip at the Federal Open Market Committee’s June meeting, with the swaps market implying a 72.4% probability of keeping the federal funds target rate range at 5.00%-5.25%. Economists agree, according to a Bloomberg survey of 46 economists.
FOMC members have long been saying that foregoing a rate hike doesn’t mean they’re considering cutting the federal funds target rate range anytime soon. The option remains open to resume hikes if the data warrant.
Indeed, market activity shows traders expect a 25 basis point rate hike at the July 25-26 meeting. The CME FedWatch tool assigns a 53.0% probability for that action, and a 16.4% probability that the rate range will reach 5.50%-5.75%.
So assuming the Fed doesn’t change its policy rate in June, market participants will be keeping a close eye on the officials’ expectations for the rate path in their economic projections, which are released on alternating meeting.
In the last dot-plot, at the March meeting, the median rate projection for end-2023 was 5.1% for the end of 2024 was 4.3%.
Their updated rate projections will hinge on their economic outlooks, of course. Last time, the officials surprised Fed watchers by raising their year-end projections for core PCE inflation to 3.6% from 3.5% previously.
ING Chief International Economist James Knightley believes that the Fed is likely to skip, but says, “it’s going to be close” as economic data has been mixed.
Goldman Sachs’s David Mericle agrees with the view that the Fed will pause as “Fed leadership has signaled clearly that it sees pausing for now 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 increase the risk of accidentally overtightening.”
ING’s Knightley doesn’t rule out a June hike. With inflation continuing to run hot, nonfarm payrolls jumping 339K, the Australian and Canadian banks hiking rates, and hawkish comments by a few Fed officials, “the result is that pricing for the June FOMC meeting is not far off a coin toss (just under 10 bp priced) and July is looking a decent bet for a hike (21 bp priced),” Knightley wrote in a recent note to clients.
Tuesday’s CPI report could be a deciding factor. May consumer price index is expected to increase 0.3%, ticking down from the 0.4% rise in April. Core CPI is expected to rise 0.4%, unchanged from the M/M rate in April. A shock on that number could spur the FOMC to boost its rate by another 25 bps to ensure that it’s in restrictive territory.
Even if the CPI number comes in hotter than expected, Goldman’s Mericle expects it will be difficult fo the Fed “to walk back its guidance at this point.”
SA analyst Damir Tokic sees the Fed continuing to tighten as inflation is not likely to come down as fast as the central bankers want. “The return to the 2% inflation target is unlikely without a deep recession,” he said.
Fellow SA analyst John M. Mason, on Federal Reserve Watch, reviews the questions the central bankers will face this week.