FOMC expected to sound hawkish with or without a pause

Based on the latest remarks by Fed Chair Jerome Powell and the latest statements by Fed officials about monetary policy tightening in the US, major banks expect the Fed to take a break but signal higher rates ahead, meaning that the battle against inflation is not over, with a special focus on the US economy’s need to avoid the repercussions of the latest banking sector crises as well as the impact of higher loan costs on American businesses.

The Fed is unlikely to close the door for further interest rate hikes. That is to say the Fed could tighten by a final 25 bps rate hike in June to a range of 5.25%-5.50%. Some other analysts believe that a pause is likely for the FOMC to digest economic data and that Powell and Co will likely stress at the press conference that the Fed is data-dependent but that it also has a hiking bias. The Fed will raise the Fed funds rate at least one more time this year.

In summary, markets expect rates to be kept steady after several Fed officials highlighted a skip. Forward guidance will be key. The Fed is data-dependent but has a hiking bias. The Fed is expected to maintain rates unchanged and focus on communication around potential hike in July and the updated dots.

By leaving the door open to a July rate hike, the FOMC will be able to convince the hawks to skip June, this is why one rate hike of 25 bps is expected before the FOMC takes a pause for the remainder of the year. Economics also expects that the Fed will pass on raising interest rates.

The US unemployment rate ticked higher in May, and job openings have continued to fall. But labour markets are still exceptionally tight and have been more resilient than expected despite higher interest rates. Still, it takes time for tighter monetary policy to impact the economy and there are signs that inflation pressures are easing, even if it’s happening more slowly than policymakers would like.

The awaited monetary policy meeting statement, Summary of Economic Projections (SEP), dot plots, and Chair Powell’s press conference are all expected to sound hawkish, signaling the likely need for further policy tightening as soon as the July 26 meeting.

Wells Fargo sees the most likely outcome for this week’s meeting as the FOMC making no change to its policy rate but making clear that another hike at its July 26 meeting remains as a distinct possibility. According to Credit Suisse, the FOMC appears likely to ‘skip’ hiking the Fed Funds rate at its June 14 meeting but still signal that further hikes remain possible if not likely at subsequent meetings. If the FOMC does pause this month, there is a meaningful chance it will hike 25 bps in July.

The resilience of recent activity data and ongoing sticky inflation suggest the FOMC should consider raising the fed funds rate (FFR) by 25 bps to 5.50%. However, based on recent Fed communication, the central bank is leaning toward skipping a rate hike at this meeting and potentially tightening more later. The FOMC is expected to upgrade its GDP and inflation forecasts for 2023, and thus a higher terminal rate view is a possibility.

The resilience of recent activity data has resulted in ANZ upgrading its 2023 GDP forecast by 0.2ppt to 1.5%. ANZ maintains its terminal FFR view of 5.50% and continues to see risks to the upside. ANZ now expects peak rates to hold to mid-2024 from Q1.