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Fed actions hawkish ‘skip’, revises rate projections

By Charbel Kadib
4 minute read

The central bank has left the funds rate on hold but now expects further rate hikes over the medium-term.

The Federal Open Market Committee (FOMC) held the funds rate at 5–5.25 per cent at its June board meeting to allow for more time to “assess additional information” relating to the overall trajectory of the US economy.

The FOMC said recent indicators suggest the economy has “continued to expand at a modest pace”, pointing to “robust” jobs numbers and continued inflation stickiness.

But concerns over the longer-term stability of the US banking system following three collapses in March and April, and signs of a tightening in credit conditions, have clouded the Fed’s monetary policy outlook.

“In assessing the appropriate stance of monetary policy, the committee will continue to monitor the implications of incoming information for the economic outlook,” the FOMC statement read.

“The committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the committee’s goals.

“The committee’s assessments will take into account a wide range of information, including readings on labour market conditions, inflation pressures and inflation expectations, and financial and international developments.”

Notably, the FOMC updated its forward guidance for monetary policy, with median projections for the terminal funds rate increasing to 5.6 per cent.

This shifted in line with updated expectations for US GDP growth, inflation, and unemployment.

Real GDP is now expected to grow 1 per cent (revised up from 0.4 per cent), the unemployment rate is tipped to end the year at 4.1 per cent (revised from 4.5 per cent), and core inflation is tipped to moderate to 3.9 per cent (revised from 3.6 per cent).

In his post-meeting media briefing, Federal Reserve chair Jerome Powell was asked why the Fed opted to hold the funds rate if it expects the battle against inflation to persist beyond initial projections.

Chair Powell said the FOMC has judged the pace of tightening should be staggered over the coming months given the full impact of previous hikes has yet to filter through to the economy.

“Speed was very important last year [but] as we get closer and closer to the destination [it’s] common sense to go a little slower, just as it was reasonable to go from 75 bps to 50 bps to 25 bps,” he said.

“So, the committee thought overall, that it was appropriate to moderate the pace, if only slightly…”

“…I think it allows the economy a little more time to adapt, as we make our decisions going forward.”

As for the timing of future cuts to the funds rate, Mr Powell said the central bank does not expect to commence an easing cycle in 2023.

“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, if you think about it,” he said.

“Inflation has not really moved down — it has not so far reacted much to our existing rate hikes.”

The median expectation among FOMC members is for rate cuts of over 100 bps over the course of 2024, before dropping to 2.5 per cent over the longer term.

The Fed’s latest monetary policy call comes just a day after the release of the latest US consumer price index (CPI), which lifted 0.1 per cent in May.

However, the rate of inflation slowed following a 0.4 per cent increase in April.

Since peaking at 9.1 per cent in June 2022, annualised inflation has moderated to 4 per cent, but remains 2 percentage points above the Fed’s target.