Federal Reserve members kept interest rates unchanged in June but signaled the possibility of additional rate hikes in 2023.
The U.S. Federal Reserve agreed on Wednesday to hold its benchmark federal funds rate steady between 5% and 5.25% after 15 months and 10 consecutive rate hikes. However, Fed members indicated that further increases were likely this year if the economy and inflation don’t show significant signs of cooling.
“Holding the target range steady at this meeting allows the Committee to assess additional information and its implications for monetary policy,” Fed Chairman Jerome Powell said in his policy statement following the two-day Federal Open Market Committee (FOMC) meeting.
Although the decision to pause rates can be seen as bullish — considering headline inflation rates dropped by more than 50% year over year in May — FOMC members concluded that the U.S. economy had not reached a sufficiently restrictive level to bring inflation down to the Fed’s 2% target.
However, given the lagging nature of monetary policy in the U.S., PNC Chief Economist Gus Faucher asserts that the FOMC made the appropriate decision for a hawkish pause at the June meeting.
“With monetary policy working with a lag and given the tightening in financial conditions that have [sic] occurred in 2023 as problems have emerged in the banking system, the FOMC wants to take a breather to evaluate the impacts on the U.S. economy, Faucher told The Dallas Express in an email.
Fed Futures is currently projecting a 34.3% chance of a second rate pause in July and a 65.7% chance of a 25-basis point increase.
“The FOMC is pointing to further near-term rate hikes given that inflation, although slowing, remains well above the FOMC’s 2% objective,” said Faucher.
While Federal Reserve officials remain mixed on how many more rate hikes to approve before reversing course, the consensus among FOMC members is that the U.S. Central Bank will issue two more 25-basis-point rates before finally cutting rates sometime in 2024, according to the Fed’s most recent Summary of Economic Projections released on June 14.
“Federal Reserve officials agreed to hold interest rates steady after 10 consecutive increases, but … 12 officials see rates rising to a range of at least 5.5%-5.75% this year, 4 more officials have at least one more hike this year, and only 2 see no more hikes,” tweeted Nick Timiraos, chief economics correspondent for The Wall Street Journal.
“The updated Summary of Economic Projections, or ‘dot plot‘ … has a median projected fed funds rate of 5.6% at the end of 2023, compared to a median of 5.1% in the previous dot plot from mid-March,” Faucher told The Dallas Express.
“This suggests two additional fed funds rate hikes over the rest of 2023. But the dot plot does point to potential rate cuts in 2024, with the median rate at the end of next year at 4.6%,” Faucher said.
The next two-day FOMC meeting will be held July 25-26.