FOMC opens the door to extra hikes in H2 2023 – UOB

The Fed in its 13/14 Jun 2023 Federal Open Market Committee (FOMC) meeting, unanimously agreed to keep the target range of its Fed Funds Target Rate (FFTR) unchanged at 5.00%-5.25%. This was the first pause in the Fed’s current rate hike cycle after having raised rates for ten meetings in a row. The Fed also voted unanimously to keep the interest rate paid on reserve (IOER) balances unchanged at 5.15%. 

In the monetary policy statement (MPS), the most important change was it noted “Holding the target range steady at this meeting allows the Committee to assess additional information and its implications for monetary policy.” (i.e. the pause in the rate hike cycle was specific to this meeting only.) And the most noteworthy commentary from FOMC Chair Powell during the press conference was the Fed has “covered a lot of ground and the full effects of our tightening have yet to be felt” and that the pause is only for this meeting and that the Jul FOMC meeting “is live”. As expected, Powell declined to comment on whether the Fed will resume its hiking cycle in Jul, only to suggest that the Fed is “stretching out to a more moderate pace of hiking”. 

As for the Dotplot, the median terminal rate projection was pushed higher to 5.6% in the Jun FOMC (from 5.1% in Mar 2023 FOMC), implying two more 25-bps rate hikes or one more 50-bps hike this year. 12 of the 18 FOMC policymakers have their dots coalescing at or above 5.50-5.75%, indicating strong support among policy members for further hikes.  In the Jun Summary of Economic Projections (SEP), the two key revisions were 2023 GDP growth (which was revised higher to 1.1% from 0.4% previously) and 2023 core PCE inflation (which was revised higher to 3.9% from 3.6% previously). Unemployment rate in 2023 was revised lower to 4.1% (from 4.5% previously).

FOMC Outlook – One More Hike In Jul FOMC: The latest FOMC statement and Dotplot revision together with Powell’s comments (“stretching out to a more moderate pace of hiking”) are making us reassess (again) on the terminal rate, especially against the still elevated core PCE in 2023. As such, it seems that the Fed will hike some more, but as Powell alluded to during his presser, the [hiking] cycle is near the end, so there is possibly more hikes to come but very limited. We now expect the Fed to hike one final time by 25-bps in the Jul 2023 FOMC and pause thereafter. This means, with the FFTR currently at 5.00-5.25%, we are adjusting our terminal FFTR level higher to 5.25-5.50%. We continue to expect no rate cuts in 2023, so this terminal rate of 5.50% is forecast to last through 2023, with rate cuts coming in from 1Q 2024 onwards.