Federal Reserve pushes pause on interest rate hikes

For the first time since beginning the current tightening cycle in March 2022, the Fed opted against raising the federal funds rate at the June 14, 2023, FOMC meeting. The decision officially ends a run of 10 consecutive interest rate hikes by the central bank.

While the move was expected, the Fed’s release of its summary of economic projections signifies that its hawkish tone on curbing inflation remains intact, as additional rate hikes in 2023 are projected, and the federal funds rate was pushed out to 5.6% by year-end, up from March’s 5.1% year-end projection.

“The Fed’s new dot-plot forecast of potentially higher interest rates in 2023 suggests it is too early for the Fed to claim victory over inflation,” said Raymond James Chief Investment Officer Larry Adam. “However, given the recent disinflationary trends in place, especially with the recent deceleration in CPI and PPI we have seen this week, we still believe the Fed is in the latter stages, if not near the end, of this tightening cycle.”

The updated dot plot also speaks to the Fed’s continued hawkishness. The median federal funds rate for the end of 2024 increased from 4.1% in March to about 4.4% in June.

“As we’ve stated previously, it is clear that the Fed is convinced that in order to prevent markets from bringing longer-term interest rates down, it needs to continue to push the federal funds rate, which is the only interest rate it controls, higher,” said Raymond James Chief Economist Eugenio Alemán.

The Personal Consumptions Expenditures (PCE) inflation forecast moved a touch lower, from 3.3% in March to 3.2% in June, while Core PCE increased from 3.6% in March to 3.9% in June.

The decision to pause keeps the Fed’s cumulative total increase over the last 15 months to 500 basis points (bps), and the federal funds rate remains 5.00%-5.25%, the highest range in the past 15 years.

“In our opinion, there is no question that the economic data – for example, slowing inflation, rising jobless claims and below-trend growth – are moving in the direction the Fed wants. [The movement] is just not happening at the pace that [the Fed] wants,” said Adam. “The big question is how much patience the Fed has to allow the disinflationary trend to continue before tightening further. Lifting the potential fed funds rate ‘dot’ for 2023 allows the Fed more flexibility to remain balanced in the event the disinflationary path stalls.”