Fed Increases Rates, Signals Potential Pause in June

In a move that was widely anticipated by analysts and investors, the Federal Reserve has raised the fed funds target range by 25 basis points (bps) to 5.00-5.25%. According to Josh Nye, Senior Economist at RBC Economics, this increase aligns with the Federal Open Market Committee's (FOMC) median dot plot from March and may be the final hike of the current cycle. Notably, the policy statement introduces the possibility of a pause at the next FOMC meeting in June.

Nye explains that the FOMC has altered its language, shifting from expecting "additional policy firming" to determining "the extent to which additional policy firming may be appropriate." During his press conference, Fed Chair Jerome Powell described this change as "meaningful," though he clarified that a decision on a pause has not yet been made. With 7 out of 18 FOMC participants in March believing rates may need to move even higher, Nye cautions against ruling out another hike. However, he argues that the new language suggests a pause in June is the Committee's base case, in line with RBC's forecast, market consensus, and pricing. Nye emphasizes that data would need to "surprise to the upside" for rates to rise further.

In terms of other changes to the policy statement, Nye notes that the FOMC continues to highlight modest economic growth, robust job gains, low unemployment, and elevated inflation. Powell acknowledged the labor market as "very tight," but mentioned "some signs that supply and demand in the labor market are coming back into better balance" and evidence of easing wage growth. He also referred to indications of policy traction and potential "further headwinds" for the economy due to tighter credit conditions resulting from strains in the banking sector.

Considering these factors, Nye believes that the Fed has sufficient reasons to adopt a more cautious stance following the rate increase. He cites "growing cracks in the labor market, signs the economy is losing momentum, and uncertainty around the impact of banking turmoil" as the primary causes for the Fed's potential move to the sidelines.

 

Footnotes:

1 Adapted from source: "RBC Royal Bank." 3 May. 2023, https://e.advsr.link/rbc-economics-may-3-2023.

 

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