FED's direction after June FOMC

After the cycle of raising interest rates from 0-0.25% to 5-5.25% lasting 10 consecutive months, the Fed finally paused one of the fastest policy tightening cycles in US economic history at last week's FOMC meeting. However, Governor J.Powell gave a “hawkish” speech, implying that this pause in rate hikes might only be temporary with 2 more hikes from now until year-end. Viet Hustler's mid-week market analysis article has summarized the key news from the FOMC on 06/14 last week. The question raised is:

• Has the Fed officially stopped the rate hike cycle or just spaced out the 2023 rate hike plan?

• What factors could impact the Fed's next steps?

• What will be the impact of the subsequent tightening policies?

This weekend's macroeconomic article from Viet Hustler will be dedicated to in-depth analysis of the Fed's stance and planned direction after last week's FOMC. 

Fed's interest rate policy after last week's FOMC

• Fed kept rates unchanged at last week's FOMC at: 5.00-5.25%.

  

• However, Powell's speech and the FOMC members' stance signal that the rate hike pause is only temporary to observe the economy's situation. 

• Interest rates may continue to rise in the year-end meetings as inflation remains quite stubborn.

  • While current rates are at 5-5.25%, the Fed's projections show rates peaking at an average of ~5.6% (dot plot) by year-end,…

    • up from the March projection of 5.1%. 

    

  • Powell emphasized: almost all FOMC members think that more rate hikes are needed… but Powell also acknowledged that “the disinflation process needs to proceed gradually,” and “...it will take some time.”

    

• This raises the question: has the Fed really stopped rate hikes or just simply spaced out the rate hikes this year?

  

• The market is betting on a 69% chance that the Fed will hike rates +25bps at the July 2023 FOMC meeting. 

  

• However, although Powell emphasized there will be no rate cut this year and early next year, the market still predicts the Fed will cut rates from Nov 2023-01/2024.

  

The Fed's next actions will entirely depend on its observations of inflation's direction and the lagged impacts of credit crunch or banking crisis on the market in the coming period!

Fed's direction in monetary policy