Union Bancaire Privée
The Fed has decided to be on a pause in June at 5.0%-5.25%, but the FOMC has opened the window for potential two other rate hikes over the rest of this year. According to the Fed, risks remain on the upside on inflation, while economic forecasts for this year have been adjusted higher on growth, inflation and lower on unemployment rate.
M. Powell recognized the FOMC has underestimated the resilience of the activity and also overestimated the time of response of services to rate hikes. In July, data should bring more comfort on disinflation process, but still relatively strong data from services and labor. As seen in the surprising rise in the Dot plots, reflecting governors’ projections of key rates, data should not yet comfort the most hawkish members within the FOMC to stay on a pause. Uncertainties could remain in place for the next September meeting, even if M. Powell will force the pause. This should leave uncertainties about a potentially unfinished Fed’s job on inflation and non-definitive pause on key rates.
The lesson from past rate hikes and uncertainties surrounding next FOMC decisions is the FED will take time before easing its policy next year. Money markets are pricing rate cuts in Q1-24, but the FOMC should wait for more comfort on a real disinflation trend on both labor and services before rejuvenating the economic cycle.
