La Française: A temporary pause, but all eyes on the June CPI report

La Française: A temporary pause, but all eyes on the June CPI report

12 juni 2023

Monetair beleid Fed
Federal Reserve.jpg

We expect that the Federal Open Market Committee (FOMC) will leave the federal funds target rate unchanged for the first time since early 2022. However, we anticipate that the new median dot plot will show 25 basis points of additional tightening in 2023.

The Federal Reserve (Fed) will update its new Summary of Economic Projections (SEP) and will probably indicate higher growth and a lower unemployment rate at the end of 2023 vs its March projections.

Please find below what we expect:

  • The FOMC to maintain its policy rate unchanged within a range of 5.00%-5.25%.
  • Jerome Powell to reiterate that the Fed needs to keep interest rates higher for longer. He will likely emphasize that this is not the end of the tightening cycle, and that future monetary policy decisions will be based on growth and inflation outlooks.
  • The Fed to continue quantitative tightening at a rate of $95bn per month.
  • Referencing the dot plot, we expect to see the median dot revised upwards for 2023 (compared to March projections at 5.4%) and 2024 (March projections at 4.5%). We anticipate no change for 2025 or over the longer-run.
  • Regarding revised economic projections, we expect to see higher growth for 2023 (from 0.4% to 0.7%) and no change for 2024 and 2025 (remaining at 1.2% and 1.9% respectively). We expect the committee to keep its median headline and core inflation expectations broadly unchanged for 2023 (at 3.3% and 3.6% respectively) and the next two years (at 2.5% and 2.6% for 2024 and at 2.1% for both for 2025). We also expect unemployment rate expectations for 2023 to be revised downwards from 4.5% to 4.2-4.3%.

In summary, we expect that the FOMC will choose to adopt a wait and see approach at this meeting, unless there is a significant positive inflation surprise on June 13 which would coincide with the start of this meeting. However, despite this pause, Chair Powell is expected to signal that Fed policy rates might not be sufficiently restrictive given the persistent nature of inflation and the resilience of the U.S. labor market. We believe this committee could push U.S. interest rates moderately higher.

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