Fed's new projections may fill the void on interest rate guidance
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[June 02, 2023] By
Howard Schneider
WASHINGTON (Reuters) - Federal Reserve officials, whose hike, skip or
pause messaging on interest rates has become a high-stakes word puzzle
for investors, seem ready to end the U.S. central bank's run of 10
straight rate increases later this month while leaving the door open to
a future rise in borrowing costs.
But after weeks in which Fed policymakers tried hard to keep their
options open - with those inclined towards more hikes acknowledging a
case to hold steady, and those worried about higher rates acknowledging
stubbornly high inflation may require them - new economic projections to
be issued at the end of the June 13-14 meeting will force central bank
officials to give the sort of hard guidance through numbers that they've
been reluctant to provide through words.
Since the release of their last economic projections in March, the
unemployment rate has fallen and inflation has largely moved sideways.
At the same time, evidence of a slowing economy has begun to build, with
particular signs of stress among lower-income households, rising credit
card delinquencies, and widespread uncertainty about how strict banks
will become in lending after a string of high-profile failures.
Amid those competing views of the world - one where inflation remains
the dominant risk, one where the economy is about to buckle - officials
will have to take a stand on whether the current 5.00%-5.25% range for
the Fed's benchmark overnight interest rate is still considered adequate
to lower inflation - the majority view on the policy-setting Federal
Open Market Committee since late 2022 - or whether rates will need to
rise regardless of the risk to an economy that may be losing steam.
If sentiment is leaning momentarily towards holding rates steady at the
upcoming meeting, the outcome is not a lock, with important jobs data
due to be released on Friday and new inflation data coming on June 13,
nor does it signal what is likely to happen next.
"It's not clear to us that any of the 11 (FOMC) participants who
expected a 5.125% terminal rate in March have changed their minds,"
Tiffany Wilding, North American economist for PIMCO, wrote in an
analysis. She expects the Fed to keep its policy rate steady this month
"while hinting at potential further hikes," a way to compromise among
different views and keep pressure on financial conditions.
Fed officials will enter a pre-meeting "blackout" period after Friday,
with no formal chance to reshape market or household expectations as the
final data reports for the inter-meeting period are released. That
includes this week's U.S. employment report for May and the release of
Consumer Price Index data for May on June 13, when policymakers will
gather in Washington.
CANNOT RULE OUT A HIKE
At its May 2-3 meeting, the Fed approved its 10th straight rate increase
since March 2022, but in doing so shifted tactics from a clear
tightening path to a more ambiguous, "meeting-by-meeting" approach that
in theory would allow incoming data to shape policy choices.
Left unstated is how reactive policymakers would be in the face of
certain data points - stickier inflation, for example, or
stronger-than-anticipated job growth - and investor views of the outcome
of the June meeting have been volatile as a result.
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The Federal Reserve building is pictured
in Washington, U.S., on March 19, 2019. REUTERS/Leah Millis/
In the last two weeks, contracts tied to the federal funds rate have
jumped from pricing in a rate-hike pause this month, to pricing in
an increase, to, as of Thursday, again seeing the Fed as likely to
"skip" a hike at the upcoming meeting only to deliver one again in
July, and then start cutting rates in September.
Fed Chair Jerome Powell and others insist that sort of erratic path
is not their base case. The intent, rather, is to reach a
"sufficiently restrictive" policy rate and remain at that level
until it is clear inflation is falling towards the Fed's 2% target.
Inflation is currently more than twice that level.
Economists, including veteran Fed watchers, are also divided between
those who see inflation and the economy on the verge of a fast
slowdown, those who see the central bank as still poised to hike
given inflation's persistence, and a few who see the Fed managing
aptly towards a "soft landing" in which the economy and inflation
slow without triggering a recession.
Opinions have been shifting quick. The release of a Labor Department
report on Wednesday that showed an unexpected jump in job openings
weighed towards a rate increase given the Fed's focus on the
strength of the job market; remarks by Fed Governor and vice chair
nominee Philip Jefferson later that day tilted towards a pause when
he said "skipping a rate hike at a coming meeting would allow the
committee to see more data" before deciding if tighter policy was
even needed.
For Larry Meyer, a former Fed governor who analyzes monetary policy
for his Washington-based consulting firm, the jump in job openings
"pushed us over the edge" to believe the central bank will raise
rates again in June.
But "that doesn't mean we have great conviction" about the outcome,
he wrote.
At the other end of the spectrum, Ian Shepherdson, the chief
economist at Pantheon Macroeconomics, in a briefing this week
checked off a laundry list of signs the economy is flailing, from
weakening business investment to soured small business sentiment to
a drop in real-time measures of things like restaurant dining, a
proxy for the sort of services spending that may need to cool for
inflation to fall.
Still, Shepherdson's Fed outlook was framed with a similar lack of
certainty - a victory, in a way, for a central bank trying to avoid
making promises.
"I do think they are done" with rate increases, he said, but "I
cannot rule out another hike in June."
(Reporting by Howard Schneider; editing by Paul Simao)
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