Coinspeaker
Fed Pauses on Rate Hike but Warns of Two More Coming This Year
On Wednesday, June 14, the US Federal Reserve (Fed) decided to put a pause on its unprecedented rate hike cycle. If not, this would have been the 11th consecutive rate hike by the US central bank.
But during this two-day meeting, the Federal Open Market Committee decided to hold off on a rate hike as the inflation numbers for the month of May 2023, cooled down a bit. However, the Fed has projected two 25 basis points rate hikes later this year.
Speaking at the news conference following the FOMC meeting, Fed Chair Jerome Powell said:
“We have raised our policy interest rate by five percentage points, and we’ve continued to reduce our security holdings at a brisk pace. We’ve covered a lot of ground and the full effects of our tightening have yet to be felt.”
The possibility of future rate hikes made the US equities jittery with the top three indices almost ending on a flat note during Wednesday’s trading session. The central bankers have announced that they will observe the effects of recent policy actions for an additional six weeks as the Federal Reserve combats inflation, which has recently shown some positive but uneven indications. As a result, the Fed’s main interest rate will remain within the target range of 5% to 5.25%.
In the post-FOMC meeting statement, the Fed said: “Holding the target range steady at this meeting allows the Committee to assess additional information and its implications for monetary policy.”
When Will the Fed Announce Next Rate Hike?
The next FOMC meeting shall happen on July 25-26. Fed Chairman Jerome Powell hasn’t yet made a decision on whether the next rate hike shall happen in July. The Fed’s decision was surprising because of the “dot plot”, which shows the expectations of individual members of the FOMC for future interest rates.
In the dot plot, the dots representing the expectations moved significantly higher. This pushed the median expectation to a funds rate of 5.6% by the end of 2023. If the FOMC continues to raise rates in quarter-point increments, it suggests that there could be two more rate hikes in the remaining four meetings this year. According to Bank of America’s note after the meeting, they anticipate the Fed to raise rates in July and September.
Although the FOMC members approved Wednesday’s move unanimously, there have been considerable disagreements among them. Two members of the committee believe that there will be no interest rate hikes this year, while four members expect one increase and nine members, which is half of the committee, anticipate two hikes. Additionally, two more members predict a third hike, and one member forecasts four more hikes, assuming each hike is a quarter-point increase.
The committee members have also adjusted their forecasts for future years. They now predict that the Fed funds rate will reach 4.6% in 2024 and 3.4% in 2025. These predictions have increased compared to the previous forecasts in March, which were 4.3% for 2024 and 3.1% for 2025, according to the Summary of Economic Projections.
However, the forecasts for future years suggest that the Fed may start reducing interest rates by a full percentage point in 2024 if the current outlook for this year remains unchanged. The long-term expectation for the fed funds rate remains at 2.5%.
Fed Pauses on Rate Hike but Warns of Two More Coming This Year
