A Hawkish Pause: Landing Flare for the Fed?

The Federal Reserve’s monetary policy committee maintained the federal funds rate at a top target rate of 5.25% at the conclusion of its June meeting. The Fed will also continue to reduce its balance sheet holdings of Treasuries and mortgage-backed securities.

Despite the June pause, the Fed’s projections indicated perhaps two more rate hikes are in store in the coming months. The median forecast for the Fed’s target for the federal funds rate is now 5.6%, which would imply another two additional 25 basis point increases.

The June announcement appears to be a more hawkish outlook for rates than the May decision and communication, which indicated the central bank was close to finishing its tightening cycle. But given the ongoing strong jobs numbers, the expansion of stock/equity prices, and macro data leaning a little closer to a soft-landing scenario, the Fed appears to believe more work needs to be done to get the inflation path back to a target of 2%. This would be consistent with the “skip” scenario for the June decision.

Alternatively, this may be messaging to markets that rate cuts are off the table for the second half of 2023, which is consistent with our outlook (an analogy … was today’s projection like a plane pointing higher as in a landing flare? An airplane flares up as its lands to ensure a softer landing).

The Fed faces competing risks: elevated but trending lower inflation combined with ongoing risks to the banking system and macroeconomic slowing. Chair Powell has previously noted that near-term uncertainty is high due to these risks. Nonetheless, economic data is solid.

The Fed stated: “Recent indicators suggest that economic activity has continued to expand at a modest pace. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated.” In fact, the Fed lifted its economic forecast for 2023 from a 0.4% growth, as estimated in March, to 1% growth for the current outlook.

The Fed nodded to a more data-dependent mode by stating: “Holding the target range steady at this meeting allows the committee to assess additional information.” So, despite the projection suggesting that two more rate hikes are on the table, they are nonetheless pausing this month. That is an important change to prior meetings’ decisions in terms of confronting these competing risks.

NAHB Chief Economist Robert Dietz provides more analysis in this Eye on Housing post.