Economists, the markets, and regular folk turned Fed watchers harbored two positive expectations for the central bank’s pivotal June 14 meeting. The first—that the behemoth of money would leave its benchmark rate unchanged after 10 consecutive hikes—proved correct, but brought cold comfort. Reason: The second widely held view of gentler times ahead, putting the odds of a July increase at just 50-50, and anticipating no further jumps thereafter, got crushed by the neo-hawkish stance adopted by Chairman Jerome Powell. The freshly issued, median forecast from the Open Market Committee now calls for a Fed funds rate of 5.6% by year end, suggesting two 25-basis-point increases to come. That’s a shocking downer from the OMC’s March prediction for the current 5% to 5.25% range to prevail at the close of 2023.
Powell and the OMC polling sent a stern message that inflation remains both dangerously high and stubbornly persistent. Though the CPI downshifted to a less-than-anticipated, and apparently moderate, advance of 4% in May, Powell stressed that the “core” number, excluding food and energy, stayed alarmingly elevated at 5.3%. To deepen the dilemma, the OMC, on average, sees the core rising at 3.9% when this year ends, well above the Fed’s 2% target, and higher than the March estimate of 3.6%. Powell also emphasized that the second principal factor determining the Fed’s actions besides the core CPI—the jobs market—“remains very tight,” and the OMC sees the employment picture staying hotter over the coming months than the quicker loosening foreseen in March.
