The U.S. Federal Reserve officials announced they opted to hold the benchmark interest rates steady after today’s Federal Open Market Committee (FOMC) meeting. The current federal funds rate target remains at 5% to 5.25%, but most of the members of the FOMC expect rates to rise further by year-end. In the press conference following the rate announcement, Chairman Powell mentioned that, while the economy has slowed, the committee members believe the full impact of the previous hikes have yet to work through the economy.
Committee members differed on their rate predictions. Nine of the committee members forecasted that additional tightening will be necessary to fight inflation with a terminal benchmark rate by year-end between 5.5% and 5.75%. This suggests that two more rate hikes will occur by year-end. Four officials forecasted rates would fall between 5.25% and 5.5%, two members predicted rates would remain steady and four predicted rates would end the year above 5.75%. The median forecast of the committee members for 2023 GDP increased to 1.0% from 0.4% in March, and the unemployment rate fell to 4.1% from March’s estimate of 4.5%. Personal Consumption Expenditures (PCE) Price Index inflation dipped to 3.2% from 3.3%, and the Core PCE inflation increased to 3.9% from the March prediction of 3.6%.
Overall, the Federal Reserve’s pause in rates, with a hawkish statement that indicates further rate hikes by year-end, could spell trouble in a slowing economy if the Fed follows through with additional rate hikes. When asked why the rate pause before potentially hiking later in the year, one reason given was to allow markets more time to adapt. It will also give the Fed more time to assess the damage of previous rate hikes, which generally take 12 to 18 months to work through the economy. Recent economic data, such as employment data, combined with hours worked and PMI data suggest the previous rate increases are taking hold.
Undoubtedly, the Fed is walking a fine line between a soft and hard landing.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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