DWS: Fed will implement one more rate hike in 2023

DWS: Fed will implement one more rate hike in 2023

15 juni 2023

Rente Fed
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The Federal Reserve's decision to leave interest rates alone was expected. The surprise came in the announcement that two more rake hikes may be needed before the end of 2023.

That is the conclusion of Christian Scherrmann, U.S. Economist at DWS. 'We maintain our expectation the the Fed will raise rates once more this year.' Below is his reaction to the Fed meeting:

As we expected, the Fed backed away from hiking another 25 basis-points at its June meeting. The hawkish surprise was delivered in their Summary of Economic Projections as FOMC-members indicated that two additional rate hikes might be needed by the end of 2023.

This judgment comes on the back of their assessment of somewhat higher core inflation and more growth in 2023, as well as some more resilience in the labor market. For 2024 and 2025, central bankers did not change much in their economic assessments but also indicated a preference for somewhat higher rates than before.

A very hawkish message indeed, while actually doing nothing. The obligatory press statement, which reflects the consensus among central bankers, meanwhile did not change materially, casting first doubts on the hawkish message.

Fed Chair Jerome Powell reiterated the willingness of participants to further increase rates while it was judged as 'prudent' to wait and see this time – in the end, the dot plot is not a plan and decisions will be agreed meeting to meeting, he added. While there was no discussion on how the intended two hikes will be delivered, Powell reiterated the meeting-by-meeting approach with July surely being a 'live meeting'.

We should keep in mind that their individual projections tend to change quickly and rarely reflect the ultimate outcome. For communication purposes, however, central bankers use those projections to telegraph their mood at a particular point in time, without making an outright commitment on future actions. And indeed, given that financial conditions tend to ease quickly if central bankers pivot away from hiking, a pause on rate hikes must be delivered in with care.

In other words, better make sure that actually doing nothing does not counteract your past efforts to slow economic activity. There are also learnings from past meetings, where commentators saw Jerome Powell commit dovish communication errors.

Given the recent optimism in equity markets, maybe central bankers felt compelled to push-back investors while actually doing nothing. Bond investors, at the time of writing, did not buy into two additional steps – instead still pricing in only one – but no longer expect rates cuts this year either. Maybe, after all, their approach did the trick to implement the expectations of 'higher for longer'.

We stick to our expectation of one more rate hike this year and would like to highlight that our probability of a severe recession did not increase post meeting.

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