Federal Reserve:Meetings/2023 June 14
See also: Federal Reserve
Meeting Results
- Fed interest rate unchanged in the target range of 5%-5.25% as was expected by the market.
“Holding the target range steady at this meeting allows the Committee to assess additional information and its implications for monetary policy,” the post-meeting statement said
- However, majority of the members see two more 25 basis points rate hike before the end of the year.
- FOMC members also raised their funds rate forecasts for 2024 to 4.6% from 4.3% initially.
- Additionally, they raised their funds rate forecasts for 2025 to 3.4% from 3.1% initially.
- The members now anticipates a 1% growth in GDP in 2023 from 0.4% estimate in March.
- They expects unemployment rate to be 4.1% by the end of the year versus 4.5% forecast in March.
- The members raised their forecasts for core personal consumption expenditure to 3.9% from 3.6% and lowered their forecasts for the headline number to 3.2% from 3.3%.
- The outlook for subsequent years in GDP, unemployment and inflation were little changed.
Magaly's Assessment
Even though the economic projections show 2 more rate hikes in the future, Powell language signals a lot of uncertainty if this is actually going to happen. Given the market reaction during and after Powell conference, it seems the market does not completely believe this will be the case.
After the Fed meeting, the market still prices only a 65% probability of a hike in July, but a pause after that for the rest of the year. No rate cuts are now expected in 2023.
Powell mentions not having much confidence in economic projections, as they are very data dependent, making them less certain. And the decision and developments will be made based on incoming economic data.
In my opinion, that FED will hike rates again, only if inflation accelares again or remains sticky for several months, and if the economic data remains resilient, if this is not the case, I dont expect them to rise again.
What seems very clear is that as long as the economy holds well, rate cuts shouls not be expected, as Powell said not to expect cuts anytime soon because real rates are needed for inflation to come down to target. It will be appropriate to cut rates at such time as inflation is coming down really significantly
Projections
| Variable | 2023 | 2024 | 2025 | Longer Run[1] |
| Change in real GDP | 1 | 1.1 | 1.8 | 1.8 |
| Unemployment rate | 4.1 | 4.5 | 4.5 | 4 |
| PCE inflation | 3.2 | 2.5 | 2.1 | 2 |
| Core PCE inflation | 3.9 | 2.6 | 2.2 | |
| Federal funds rate | 5.6 | 4.6 | 3.4 | 2.5 |
Notes:
Additional Rate Hikes
- It may make sense for rates to move higher but at a more moderate pace. So the pace of the increases and the ultimate level of increases are separate variables.
- July meeting a decision hasn’t been made, expect that it will be a live meeting. We will see the data, will hear Fed people talking about it, and markets will have to make a judgment. Powell reiterated that they don’t go out of their way to surprise markets or the public.
- There are benefits to moderate the pace of hikes: gives us more information to make decisions, allows the economy a little more time to adapt and will allow time to understand the consequences of the banking turmoil
- The committee is completely unified in the need to get inflation down to 2 percent and will do whatever it takes to get it down to 2 percent over time.
Inflation
- The key to getting inflation down there is to have a continuing loosening in labor market conditions, which we have seen. We need to see that continue.
- Poweel still think, and his colleagues agree, that the risks to inflation are to the upside still.
- Forecasters, including Fed forecasters, have consistently thought that inflation was about to turn down,and they have been wrong. Core PCE inflation overall, over the last six months there is not a lot of progress. Thats why more rate hikes were signaled.
- Need to see rents bottom out here or at least stay quite low in terms of their increases for inflation to come down and rental is a very large part of the CPI.
Economic Projections
- All projections point in the same direction, that perhaps more restraint will be necessary than we had thought at the last meeting.
- Projections can actually, in reality, wind up being lower or higher, and there’s really no way to know, as the data comes in, it can move around during the intervening period. Powell never have a lot of confidence that we can see where the federal-funds rate will be that far in advance.
- Powell wouldn’t put too much weight on forecasts even one year out, because they’re so highly uncertain.
Credit tightening
- So it’s too early still to try to assess the full extent. If we were to see what we would view as significant tightening beyond what would normally be expected because of this channel then they would factor that into account in making rate decisions.
- There is a substantial amount of commercial real estate in the banking system. A large part of it is in smaller banks. It’s well-distributed. To the extent it’s well-distributed, then the system could take losses.
- In the pandemic it really was the nonbank financial sector where issues really arose and, there’s a lot of work going on with the administration in particular leading that to try to address issues in the Treasury market and in all kinds of areas in the nonbank financial market.
Liquidity
- Treasury has consulted widely with market participants about how to avoid market disruption and that they are going to watch carefully for that.
- Fed, will be monitoring market conditions carefully as the Treasury refills the TGA. The adjustment process is very likely to involve both a reduction in the RRP facility and also in reserves.
- Don’t think reserves are likely to become scarce in the near term or even over the course of the year.
- Lowering the RRP rate is not something that’s likely that we would do in the near term.
- Under no circumstances there has been conversations tabout the Federal Reserve financing some of that debt coming in
Market Expectations
Magaly's Assessment
I give almost a zero probablity that the FED will hike today, the FED is known to avoid surprising the markets, and also recent data supports a pause.
However, they will most likely leave open the possibily of additional hikes with their languaje, and could also even be in their projections.
The FED will also likely continue to consider the possibility of a soft landing as their base scenario, and the bank credit tightening just as help for their inflation fight.
Overall, apart from the pause in rates, I dont expect any significant change in their hawkish tone.
Market
Markets are expecting a rate pause in June with a 92% probability, but are expecting a rate hike in july with 60% probably. And only 1 rate cut in expected in november. [3]
| INSTITUTION | FORECAST |
|---|---|
| CITI | 25 BPS HIKE |
| CREDIT SUISSE | 25 BPS HIKE |
| TD | 25 BPS HIKE |
| VISA | 25 BPS HIKE |
| BARCLAYS | NO RATE HIKE |
| BMO | NO RATE HIKE |
| BLOOMBERG | NO RATE HIKE |
| CIBC | NO RATE HIKE |
| GOLDMAN SACHS | NO RATE HIKE |
| GURGAVIN CAPITAL | NO RATE HIKE |
| JP MORGAN | NO RATE HIKE |
| MORGAN STANLEY | NO RATE HIKE |
| NOMURA | NO RATE HIKE |
| RBC | NO RATE HIKE |
| SCOTIABANK | NO RATE HIKE |
| WELLS FARGO | NO RATE HIKE |
| PARKWAY ADVISORS | 25 BPS RATE CUT |