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Wednesday, December 6, 2023

Federal Reserve decision: Skip June, go again in July?

Federal Reserve decision: Skip June, go again in July?
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Investing.com — The Federal Reserve is expected to keep interest rates steady on Wednesday, but signal that it remains ready to resume hikes in future meetings should incoming economic data show sticky inflation and a tight labor market persist.

“[W]e expect the FOMC to pause at its June meeting next week before it considers another rate hike,” Goldman Sachs said in a recent note. The Fed’s benchmark rate currently stands at 5% to 5.25%.

Expectations for a Fed pause were given a major boost earlier this month when Fed members including vice chair nominee Philip Jefferson signaled that a pause in June would allow the central bank to assess the lagged impact of the rate hikes already delivered and the extent of tightening in lending standards from the recent banking turmoil.

Further tightening in lending standards would likely curb economic growth and help the Fed in its battle against inflation, lessening the need for further rate hikes.

“In our view the FOMC is right to be worried about lending standards tightening,” UBS said in a recent note, pointing to Fed data showing bank willingness to lend to consumers continued to deteriorate.

About 75% of traders expect the Fed to pause rate hikes on Wednesday, according to Investing’s Fed Rate Monitor Tool, with about 55% forecasting the central bank to resume hikes in July.

The Fed’s summary of economic projections, or SEP, that will accompany the monetary policy decision is widely expected to reflect expectations that the Fed isn’t done with tightening as inflation and the labor market remain too hot for comfort.

In its prior projections in March, the Fed estimated its benchmark rate peaking at the current 5% to 5.25% range. But Goldman Sachs expects the central bank to lift its outlook on rates to reflect one additional hike to a new peak of 5.25% to 5.5% and an uptick in economic growth as well as the unemployment rate and core inflation.   

There are some, however, who believe a skip in June could lead to a prolonged pause as the incoming data are likely to give the Fed reason to holster the need for further hikes after the June meeting.

“There’s a very good chance that [the Fed] is finished raising rates for this cycle, however, it is dependent on some pretty important data points over the next month and a half,” Eric Green, chief investment officer at Penn Capital Management, said Monday.

“If the data show inflation continuing to come down, then they should act by continuing with the pause,” Green added.

Beyond the Fed decision and projections, remarks from Fed Chairman Jerome Powell during the press conference will be parsed for clues on what will likely drive the Fed to stick or twist after the June meeting.

“Overall, we expect [Powell] to explain that, as time passes, they will gather more information and will decide on the next policy move depending on how economic conditions, and their implication for the outlook for growth and inflation, unfold,” UBS added.

Source: Investing.com

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