Here’s what to expect from the Fed’s rate decision

(Bloomberg) – Federal Reserve policymakers are poised to pause rate hikes for the first time in 15 months while maintaining a tightening bias that signals a possible resumption of rate hikes as early as next month.

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The rate decision and committee forecasts will be released at 2 p.m. in Washington. Chairman Jerome Powell will hold a press conference 30 minutes later.

Powell has signaled that Fed leaders would rather wait to assess the impact of past rate hikes on the economy and recent bank failures on credit conditions. However, with inflation still more than double the central bank's target, the committee is likely to stress that it is keeping open the possibility of another hike in inflation in July or September.

“This will be one of the tougher press conferences for Chairman Powell, who I think is aimed at keeping the market likelihood of a July rate hike reasonably high,” said Dean Maki, chief economist at Point72 and a former Fed researcher.

What Bloomberg Economics Says…

“The Fed is likely to hold rates on hold at the June FOMC meeting for the first time since this hike cycle began in March 2022. Chairman Jerome Powell and co. will likely describe the decision as “hawkish skipping” and maintain a tendency to wander at the July meeting.”

— Anna Wong, Stuart Paul, Eliza Winger, and Jonathan Church

To read the full notice, click here

Prices for June

A surprise in June is quite possible. While Wall Street largely agrees that the Fed will pause, economists at Citigroup Inc. and LH Meyer/Monetary Policy Analytics in Washington are forecasting a rate hike in June. Meyer's firm cites Powell's focus on risk management in the face of elevated inflation and an overly hot labor market.

The decision comes after Tuesday's CPI report, which showed headline inflation has slowed but core prices excluding food and energy have continued to rise at a rate likely to worry Fed officials.

“Inflation is still too high,” said Lindsey Piegza, chief economist at Stifel Nicolaus & Co. “The Fed opened the door for a pause, and not to go through that door now would create unnecessary worry.” But they did must announce that their work is not yet done.”

FOMC forecasts

Wall Street will focus on whether the “dot plot” in the economic forecast summary shows that the committee appears determined to hike rates again.

The central bank is split between more dovish participants willing to stick with the Committee's March forecast of 5.1% peak interest rates and hawks who want to forecast a higher final rate of 5.4% or more. Economists polled by Bloomberg expect the median forecast to remain unchanged.

The committee could raise its growth forecast for 2023, expect a more stable labor market with less unemployment this year and revise its inflation forecast upwards.

The outcome of the forecasts would be “restrictive compared to market prices because they would suggest it is just a bounce and not a pause,” said Sonia Meskin, head of US macroeconomics at BNY Mellon Investment Management.

FOMC Statement

Most of the statement will likely be almost identical to May's statement, maintaining a rate hike bias with no firm commitment. One possibility would be for the committee to state that it will leave interest rates unchanged “for now” or “at this meeting”, implying the possibility of a future move.

The statement is likely to continue to describe growth as “modest” and job growth as “robust,” reflecting recent mixed data.

disagreements

About 40% of economists expect a dissent at the meeting, which would mark a break with the FOMC's largely unanimous votes. Minneapolis Fed President Neel Kashkari, Dallas Fed President Lorie Logan and Gov. Christopher Waller, all considered hawks pushing for higher rates, are the most likely to oppose a pause.

A hawkish dissent could reinforce the view that the committee is considering further rate hikes this summer. The last time a governor had a dissenting opinion on monetary policy was Mark Olson in September 2005.

press conference

Powell will likely be under pressure to explain why Fed officials are suggesting that future tightening may be necessary, but they are standing their ground at this meeting.

“When they pause but hold on to tightening, the key tension is: if they're so sure tightening is needed in the future, why wasn't raising now been enough?” said Derek Tang of LH Meyer /Monetary Policy Analytics.

The chairman is asked about the outlook for the July and September meetings and whether he still thinks a soft landing for the US economy is likely. He is also asked to assess the impact of March's bank failures on creditworthiness.

– With support from Craig Torres.

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