Market consensus is nearly unanimous (97%) for the Federal Open Market Committee (FOMC) to raise the federal funds target range today by 25 bp to 5.25%-5.50%. The markets will await today’s policy announcement and any signals from policymakers that today’s rate hike is the last for the current rate hike cycle. Since last month’s FOMC meeting, mixed U.S. economic data and a slowing of price pressures may push the FOMC to signal a pause in its rate hike campaign and say it needs more time to assess the economy’s progress.
The FOMC’s median estimate in its quarterly summary of economic projections in June showed two more 25 bp rate increases expected this year. In today’s press conference following the FOMC meeting, Fed Chair Powell may signal that the FOMC will “skip” a hike in the following meeting in September. However, if economic news over the next couple of months shows the economy weakening and if price pressures continue to fade, the FOMC may decide to keep rates on an extended pause for the rest of the year.
While Fed Chair Powell has said he sees a narrow path for a soft landing for the U.S. economy, the Fed staff have predicted a mild recession, according to the minutes of recent FOMC meetings. Powell has said his preferred approach would be a gradual timetable for any additional rate hikes to steer the economy along. With the resignation of St. Louis Fed President Bullard, the makeup of the FOMC will be less hawkish, which could provide support to Fed Chair Powell if he favors extending a pause in the Fed’s rate hike cycle.
Several potential adverse supply shocks could reverse progress on inflation and force the FOMC to keep raising interest rates. Key risks include widespread labor strikes that disrupt the supply chain and boost wage pressures. Also, any weather-related factors that lead to a surge in food prices could throw a wrench into any plans by the FOMC to pause rate hikes indefinitely. In addition, any spikes in energy prices could also boost fuel costs that are not advantageous to lower inflation.
Although the Fed’s June dot plot showed a large majority of policymakers supporting a terminal fed funds rate of 5.75%, implying one more rate increase after today’s hike, recent dovish Fed comments suggest a dovish shift in policy. With the latest economic data bolstering the chances of a soft landing, the FOMC today is likely to signal a skip at the September policy meeting, and Fed Chair Powell may say policymakers are adopting a wait-and-see approach on future monetary policy moves. However, if the trajectory of inflation fails to keep declining or if the labor market remains robust, policymakers may have to reassess their plans for an extended pause at the September FOMC meeting.
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
