US: FOMC opens the door to a pause – UOB

Senior Economist at UOB Group Alvin Liew reviews the last FOMC gathering (May 3).

Key Takeaways

“The Federal Reserve (Fed) in its 2/3 May 2023 Federal Open Market Committee (FOMC) meeting, unanimously agreed to raise its Fed Funds Target Rate (FFTR) by 25-bps to 5.00%-5.25%, the same pace of hikes as Feb and Mar FOMC. This is the highest level of FFTR since Sep 2007.”

“The Fed made a significant change in the forward guidance in the monetary policy statement (MPS), as it removed a key part of the FOMC statement, “the Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time” (from the Mar FOMC) and replaced it with “In determining the extent to which additional policy firming may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”

“The change in language certainly opened the possibility of a pause while Powell’s post-FOMC comments cut both ways, as he called the change in the language in the FOMC statement “meaningful” but he also emphasized the Fed will be driven by incoming data and how events unfold, and it will be on a “meeting by meeting” basis to determine extent of further rate hikes. Powell continued to push back against expectations for rate cuts in 2023.”

“FOMC Outlook – Done At 5.25% And Pause For Rest Of 2023. Given what has transpired (or not) in the May FOMC, our base case remains valid. We still expect the 25-bps hike in the May FOMC to be the last one in the current Fed rate cycle and a pause thereafter. We continue to expect no rate cuts in 2023, with the FFTR terminal rate at 5.25% to last through this year.”