Fed kicks off meeting-by-meeting policymaking amid high uncertainty
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[June 13, 2023] By
Ann Saphir and Michael S. Derby
(Reuters) - Federal Reserve officials sit down Tuesday for their first
meeting in 15 months with no pre-determined interest rate hike on the
table in what amounts to the debut gathering of the
"will-they-or-won't-they" era.
With still-too-hot inflation riding their heels but abundant uncertainty
about both the economic outlook and the lagged effects of 10 rate hikes
since March 2022, a breather from increases looks to be in the cards
when the rate-setting Federal Open Market Committee meeting concludes
Wednesday.
But it may be a very short-lived hiatus.
That at least appears to be the latest "consensus" across the community
of Fed watchers who've been either doubling down on longstanding calls,
switching them, or - often in the same breath - throwing their hands and
saying anything could happen.
The Fed will likely “leave rates unchanged but warn that additional
tightening is still possible in the months ahead,” analysts at Wrightson
ICAP said in predicting the Fed's benchmark overnight lending rate would
sit pat at 5-5.25%.
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But, reflecting the hard time the team at Wrightson and other private
economists have had making up their own minds since the Fed in May set
the stage for a meeting-by-meeting approach from there, the firm told
clients: “We wouldn’t have been surprised if the Fed had chosen to
tighten again this month, but a majority of FOMC members, including the
leadership, seemed to favor a pause.”
Over at Bank of America, economists have come down on the same side as
Wrightson, though they said it was a close call.
"While incoming data point to resilience in activity and stickiness in
inflation, the Fed appears to want additional time to monitor policy
lags and regional bank stress," they wrote. They expect the Fed to raise
its target rate to 5.25%-5.5% at the July 25-26 meeting.
While that is the majority view, it's not unanimous.
Citibank economists predict it will go the other way, with the Fed
raising rates in June to temper what they also describe as "resilient"
economic activity, a very-tight labor market and persistently strong
wage and price inflation.
FOCUS ON COMMUNICATIONS
The same uncertainty is also apparent in Fed policymakers' own
assessments of their forecasts, last made in March and to be updated
this week.
The fresh economic projections, along with tweaks to the Fed's
post-meeting statement and Fed Chair Jerome Powell's comments in the
post-meeting news conference, shape expectations for the rates path
ahead, economists said. And it's quite likely that if the Fed does hold
off on rates it will prep markets for action later on.
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![](../images/061323PIX/busine99.jpg)
Federal Reserve Chair Jerome Powell
holds a press conference in Washington, U.S, May 3, 2023.
REUTERS/Kevin Lamarque/File Photo
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“Among the key innovations for this meeting, we expect the statement
will be hawkishly adjusted to note the potential for further
tightening at ‘coming meetings,’” said forecasters at Deutsche Bank.
What’s more, “given resilient data, easing financial conditions, and
a desire to prevent a pull forward in rate cut pricing, at this
point there is little downside from Powell delivering a hawkish
message," the bank said in a note.
The last Fed forecasts released at the March meeting had penciled in
a 5.1% stopping point for the federal funds rate target, where it is
now.
Economists are debating how much of an upgrade that rate forecast
gets, with forecasters speculating Fed policymakers will add between
one and two more quarter percentage point increases for this year as
it continues to contend with persistent underling price pressures.
Each Fed policymaker's view of the appropriate year-end policy rate
is depicted by an anonymous "dot" on a grid.
“Communication will be important” and the dot plot will be key to
managing expectations about the future, said Ryan Sweet, chief U.S.
economist for forecasting firm Oxford Economics. “We expect seven
dots to signal that the tightening cycle has ended but 11 dots to
indicate more monetary policy tightening would be appropriate at
future meetings.”
But there was disagreement over the dot plot as well.
"Once the Fed pauses at the June meeting, we think that the hurdle
to resume hiking only increases," Morgan Stanley economists wrote,
forecasting no change to the median 2023 "dot" this week.
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Some forecasters say that despite the uncertainty now surrounding
the outlook the central bank would be best served by just going
ahead and doing Wednesday what it probably expects it will have to
do later this summer anyway.
Favoring a rate rise this week, Oscar Munoz, chief U.S. macro
strategist of investment bank TD Securities said "if the hard data
points to an economy that remains strong enough to make the Fed
signal a likely rate hike for July, perhaps it is more optimal to go
now."
(Reporting by Ann Saphir, Michael S. Derby, Howard Schneider;
Editing by Dan Burns)
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