By Andrew Moran
For the first time in more than a year, the Federal Reserve has left interest rates unchanged but signaled that two more rate hikes are set to happen this year.
The benchmark federal funds rate held steady at a range of 5–5.25 percent, effectively ending the streak of 10 consecutive rate hikes.
“Holding the target range steady at this meeting allows the Committee to assess additional information and its implications for monetary policy,” the Federal Open Market Committee (FOMC) stated.
FOMC members say the recent metrics show that economic activity is expanding “at a modest pace.”
“Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated,” the FOMC said.
“The U.S. banking system is sound and resilient. Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks.”
The rate-setting committee confirmed that it would continue decreasing its holdings of Treasury and mortgage-backed securities.
The Survey of Economic Projections (SEP) shows that officials anticipate the policy rate to rise to a median of 5.6 percent by the end of 2023.
FOMC members expect the median federal funds rate to come in at 4.6 percent in 2024, up from 4.3 percent in the March SEP. The benchmark rate will then further ease to 3.4 percent in 2025, up from the previous estimate of 3.1 percent. The longer-run policy rate was left unchanged at 2.5 percent.
Looking ahead to the broader economy, the Fed forecasts the economy will grow by 1 percent this year, up from the March projection of 0.4 percent. Officials revised their 2024 real GDP forecast from 1.2 percent to 1.1 percent. The economy will also grow by 1.8 percent, down from 1.9 percent, according to SEP numbers.
The unemployment rate was seen coming in at 4.1 percent this year, down from the previous SEP projection of 4.5 percent. The jobless rate was also revised lower, to 4.5 percent in 2024 and 2025, down from 4.6 percent.
The next FOMC meeting will be held on July 25 and 26.
The financial markets tumbled following the announcement, with the leading benchmark indexes down by as much as 1 percent.
U.S. Treasury yields were mixed, with the benchmark 10-year yield down by more than 2 basis points to about 3.81 percent.
The U.S. Dollar Index, a measurement of the greenback against a basket of currencies, erased most of its losses in the middle of the trading week, climbing back above 103.
“The Fed caused heartburn with their estimates of future rates, implying their concern for high inflation outweighs the softening in growth we are experiencing,” Jeff Klingelhofer, co-head of investments at Thornburg Investment Management, said in a note. “The most concerning data point for markets is the significant rise in the ending target for the Federal Funds rate, which moved up a full 50 basis points to 5.6 [percent].”
Don’t Call It a ‘Skip’
While some may characterize the central bank’s decision as a “skip,” Fed Chair Jerome Powell declined to call it that.
Powell said he doesn’t anticipate a rate cut until inflation falls at a substantial rate, which could still be another couple of years.
“It will be appropriate to cut rates at such time as inflation is coming down really significantly. And again, we’re talking about a couple of years out,” Powell said at the post-FOMC meeting news conference on June 14. “As anyone can see, not a single person on the committee wrote down a rate cut this year, nor do I think it is at all likely to be appropriate.”
Still, Powell is seeing progress on the inflation front, particularly in goods. However, the Fed chief said he thinks the disinflation will emanate from the housing market as rental lease prices fall.
The futures market is penciling in a 61 percent chance of a quarter-point rate hike at next month’s policy meeting.
“We didn’t make a decision about July,” Powell said. “Of course, it came up in the meeting from time to time, but really the focus was on what to do today. I would say two things. One, a decision hasn’t been made. Two, I do expect that it will be a live meeting.”
The State of Inflation Today
Heading into the FOMC policy meeting, several Fed officials suggested that a rate pause wouldn’t indicate the end of the central bank’s tightening cycle. By hitting the pause button on a rate increase, policymakers could assess the economic data and determine the next course of action.
Meanwhile, inflation growth rates continue to slow.
The annual consumer price index (CPI) eased to 4 percent in May, down from 4.9 percent in April and below the consensus estimate of 4.1 percent. The monthly CPI rose by just 0.1 percent.
Core inflation, which eliminates the volatile food and energy components, dipped slightly to 5.3 percent year-over-year. This was down from 5.5 percent in the previous and matched market expectations. Core inflation also climbed 0.4 percent month-over-month for the sixth straight month.
In May, the producer price index (PPI) fell by 0.3 percent month-over-month and eased to 1.1 percent on an annualized basis, according to the Bureau of Labor Statistics. The core PPI rose by 0.2 percent from April to May and slowed to 2.8 percent year-over-year.
Looking ahead, the Cleveland Fed Bank’s Inflation Nowcasting anticipates another sharp drop in the CPI. The model estimates that the annual inflation rate will slow to 3.2 percent, and the core CPI will fall to 5.1 percent. But the CPI and core CPI are expected to rise 0.4 percent month-over-month.
But with inflation showing signs of abating, is the Fed also achieving a soft landing?
According to the Atlanta Fed Bank’s GDPNow model estimate, the second-quarter GDP growth rate is projected to climb by 2.2 percent.