Fed takes a pause but threatens more hikes
The Federal Reserve Open Market Committee voted this week to hold the Fed Funds rate unchanged at the current 5.0%-5.25% range. The committee’s statement said, “Holding the target range steady at this meeting allows the Committee to assess additional information and its implications for monetary policy.” The pause was expected by the market, which rallied this week. Despite gloomy forecasts for 2023, the Federal Reserve appears to be staying on the path of lowering inflation without causing a severe recession.
Inflation continues to be the key indicator to watch since falling inflation will give the Federal Reserve room to pause or stop their inflation fighting interest rate increases. While inflation is still higher than the Fed’s target, it is slowing down, falling to 4% in May. The Producer’s Price Index, which follows the prices that companies pay and can be a good forward indicator of the direction of consumer prices, fell to 1.4% in May.
Meanwhile, the economy appears to be heading for a soft landing. The stock market has been benefiting from a string of economic indicators that are strong enough to reassure investors but not so strong to stoke inflation fears. For example, May’s employment report showed 339,000 jobs were added during the month, a surprisingly strong result. Looking forward, the Federal Reserve raised its June projections of economic growth, now expecting real GDP to be up 1% in 2023. While that is hardly strong growth, it is positive, which is much better than the gloom and doom recession talk from many pundits.
Of course, the Federal Reserve is still targeting 2% inflation and may need to raise rates further to get there. The Fed’s Summary of Economic Predictions issued this week signaled an additional 2 rate hikes during 2023. Stocks initially dropped on the possibility that rates could still go higher, but then rallied back. For now, the market is cheering the Fed’s pause, and seems somewhat skeptical that two more increases will be necessary. We will be watching the inflation figures closely to see if the Fed will have room to pause any rate hikes for the rest of the year.