Fed pauses rate hike, warns of 2 more this year.

On June 14th, the US Federal Reserve decided to pause its cycle of unprecedented rate hikes, which would have been the 11th consecutive hike by the central bank. During the two-day meeting, the Federal Open Market Committee decided to hold off on a rate hike as inflation numbers for May 2023 cooled down. However, the Fed has projected two 25 basis points rate hikes later this year.

Fed Chair Jerome Powell spoke at a news conference following the FOMC meeting, stating that the central bank has raised its policy interest rate by five percentage points and continued to reduce its security holdings at a brisk pace. The possibility of future rate hikes made US equities jittery, with the top three indices almost ending on a flat note during Wednesday’s trading session. The central bankers have announced that they will observe the effects of recent policy actions for an additional six weeks as the Federal Reserve combats inflation, which has recently shown some positive but uneven indications.

The next FOMC meeting is scheduled for July 25-26, and Fed Chairman Jerome Powell hasn’t yet made a decision on whether the next rate hike shall happen in July. The Fed’s decision was surprising because of the “dot plot”, which shows the expectations of individual members of the FOMC for future interest rates. In the dot plot, the dots representing the expectations moved significantly higher, pushing the median expectation to a funds rate of 5.6% by the end of 2023.

Although the FOMC members approved Wednesday’s move unanimously, there have been considerable disagreements among them. Two members of the committee believe that there will be no interest rate hikes this year, while four members expect one increase and nine members, which is half of the committee, anticipate two hikes. Additionally, two more members predict a third hike, and one member forecasts four more hikes, assuming each hike is a quarter-point increase.

The committee members have also adjusted their forecasts for future years. They now predict that the Fed funds rate will reach 4.6% in 2024 and 3.4% in 2025. The forecasts for future years suggest that the Fed may start reducing interest rates by a full percentage point in 2024 if the current outlook for this year remains unchanged. The long-term expectation for the fed funds rate remains at 2.5%.