Xiao Cui, Senior Economist, at Pictet Wealth Management.
The FOMC is likely to hike rates by 25bps, as is widely expected by markets. We don’t expect changes to QT or tweaks in other administered rates. There will be no new dot plot or economic projections. We expect Chair Powell to retain a hawkish bias as the committee still sees the next rate move as more likely up than down. Given a tight labor market and above-target inflation, policy guidance will remain hawkish to prevent aggressive pricing of rate cuts and unintended easing of financial conditions. Inter-meeting macro data suggest growth has been extraordinarily resilient to monetary restraint and the labor market remains historically tight. Price pressures have shown encouraging signs of easing, but inflation remains elevated relative to target.
Meanwhile, the Chair is likely to tiptoe around the topic of when, if at all, another rate hike is coming. Although Powell could indicate the June dot plot which shows another rate hike before year end is still informative (assuming they hike in July), he is likely to stress data dependence and a meeting-by-meeting approach to policy making. He’s likely to repeat the need to moderate the pace of hikes to better assess potential impact of monetary and bank credit tightening, but also not to take consecutive rate hikes off the table.
We expect little change to the policy statement. The current forward guidance on “the extent of additional policy firming that may be appropriate” should remain unchanged, If the language is changed back to “the extent to which” or “the extent and timing”, that would be a marginally dovish move to signal more caution around further tightening.
However, any rhetoric coming out of the meeting will be outdated before long. The Fed’s annual Jackson Hole Economic Symposium is due to take place in late August, and there are two more releases of employment and inflation data before the September FOMC meeting. These will be more informative of the monetary policy outlook, in our view.
Recent signs of disinflation and moderating job gains raise the odds of the July rate hike bring the final increase this cycle, which is our expectation. Hawkish policy bias remains – a reacceleration in inflation and strong labor market prints could prompt another hike, but more likely in November than September. We still don’t see rate cuts until at least 2024.
We don’t expect any change to quantitative tightening. The post debt-ceiling surge in T-bill issuance has been mostly absorbed by money market funds, as bank reserves drain remains limited so far. This reduces risks of an earlier pause.
