How has Fed’s Powell explained decision to leave policy rate steady in June?

Federal Reserve Chair Jerome Powell held the customary news conference after rate policy decision to explain why Fed policymakers have decided to leave the policy rate, federal funds rate, unchanged at the range of 5-5.25% at June FOMC meeting.

With the immediate reaction, the US dollar gathered strength against its rivals and the US Dollar Index climbed above 103.035 as at the time of writing, erasing a large portion of its daily losses.

Powell also responded to questions regarding hawkish revisions to the dot plot, while refraining from committing to a a return to rate increases in July.

“Nearly all policymakers view some further rate hikes this year will be appropriate”, Powell explained, adding that policymakers, including himself are “highly attentive to risks high inflation poses to both sides of mandate.”

According to Powell, “It will take time for full effects of monetary restraint to be realized, especially on inflation.” He also noted that reducing inflation is “likely to require below trend growth, some softening of labor conditions.”

Powell also pointed out that “the question of speed on rate hikes is a separate from question of level of rates”, adding that “We will look at all the data, the evolving outlook, and will make the decision in July and the risks of overdoing and underdoing are closer to be in balance.”

“By taking a little more time on tightening, we reduce the chance of going too far”, Powell commented, stressing that it will be “appropriate to cut rates when inflation comes down, as rate cuts this year will not be appropriate.”

In its policy statement, the Fed explained that holding the target range steady at this meeting will give them time to assess additional information and implications for the monetary policy. The Fed reiterated that inflation remains elevated and that Fed policymakers remain committed to returning inflation to the 2% objective.

Regarding the financing, the US central bank noted that tighter credit conditions for households and businesses are likely to weigh on the economic activity, hiring and inflation but added that the extent of those effects remains uncertain.

The Summary of Economic Projections showed that the terminal rate projection for end-2023 got revised higher to 5.6% from 5.1% in March. Similarly, end-2024 rate forecast rose to 4.6% from 4.3%.

In summary, Fed projections imply two more 25 basis points (bps) rate hikes this year and 100 bps of rate cuts in 2024. Policymakers also see higher Gross Domestic Product growth in 2023 and a lower unemployment rate and less progress on core inflation than Fed policymakers saw in March.