La Française: Cautious optimism

La Française: Cautious optimism

July 24, 2023

Monetary policy
Outlook vooruitzichten (08) weg storm crisis

Despite some progress in monetary policy, it is widely expected that the Federal Open Market Committee (FOMC) will resume rate increases at its July meeting after skipping an upward move in June.

This is what we expect:

  • The FOMC to hike rates by 25 bps to a range of 5.25%-5.50%.
  • Chair Powell to signal that the Fed could “skip” a hike at their next meeting in September. However, he will warn that the pause may not be the end of the Fed's tightening cycle, i.e., the June dot plot for 2023 projected the fed funds rate peaking at 5.6% this year.
  • Jerome Powell to indicate that the increase could come later in the year, leaving time to evaluate how the U.S. economy is evolving. In addition, he is expected to reiterate that the Fed will not rule out more rate hikes, if needed. The Fed will not allow inflation expectations to become unanchored.
  • Fed chairman to signal supply and demand are coming into better balance, with inflation decelerating and positive but slowing job growth. However, he will emphasize that ‘wage growth is still running at a pace that is well above what would be consistent with the Committee’s 2% objective’.
  • Mr. Powell to reiterate that the Fed needs to keep interest rates high for a while to make sure inflation comes down to its 2% target.
  • The Fed to continue its quantitative tightening at $95bn per month.

In summary, we believe that the FOMC will not overreact to the latest encouraging data on price pressures as the labor market remains tight. We expect the Fed to continue with its June dot plot plan (i.e., one further 25 bps rate hike). Fed chair Powell will indicate that the FOMC is satisfied with progress so far while Fed policy makers will remain very cautious with falling, but still elevated (underlying) inflation.

We do not expect this committee to come as a surprise for investors.  Consequently, it should have a limited impact on financial markets.

Related posts