June 2023 Federal Reserve Meeting Recap
Federal Reserve Skips Raising Interest Rates in June
Reasoning Behind the Interest Rate Skip, and Future Economic Projections
The Federal Reserve announced yesterday during their June meeting that they would not be raising the benchmark interest rate in the month of June, leaving the range at 5%-5.25%, which is the highest level since September 2007. This is a slight alteration from the Fed’s previous course of action to combat stubbornly high inflation rates, as they have raised the interest rate in their previous 10 meetings, having raised the benchmark interest rate by five percentage points since March 2022. Jerome Powell, the chairman of the Fed made it clear that the Federal Open Market Committee, the board that decides whether to raise the interest rate or not, expects that the interest rate will need to be raised again sometime this year. In today’s blog, I’ll dive into some of the reasons the Fed has decided to forgo a rate hike this month, what it could mean for future months, and also examine the Fed’s projections for where the interest rate could end up in the future.
What Has Influenced the Fed to Skip an Interest Rate Increase in June
Simply put, the Fed wants to wait on additional economic information to fully understand the impact of their interest rate hikes. When the Fed raises interest rates, there is a significant lag time between when the rate hike is implemented, and when the effects are fully felt in the economy. Because the Fed has raised interest rates so rapidly, and at a historically fast pace, the Fed believes it is important to take some time to wait for more economic data to come out in the near future before further increasing the interest rate, if necessary. In a statement released yesterday by the Fed, officials included language that left them room to continue to raise interest rates later in the year, saying that,
"In determining the extent to which additional policy firming may be appropriate ... the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments."
Earlier this month, the Consumer Price Index for May came out, showing a 0.1% increase, and 4% increase from a year ago, with the 0.1% increase being the lowest it has been in the previous two years. This report was one of the critical components of the Fed’s decision to skip a rate increase this month, as they wait for more data later in the month. Of the data coming out in late June, the most important to evaluate is the Personal Consumption Expenditures Price index, also known as the PCE index, which is noted as the Fed’s preferred measure of inflation. The PCE report for May will be released on the 30th of June, ahead of the Fed’s July meeting on the 26th. The Fed will also be taking a close look at the job reports coming out in the coming months, to better assess how the labor market is responding to the tighter economic restrictions in place.
Examining the Fed's Latest Economic Projections
In addition to explaining their reasoning for skipping an interest rate hike this month, the Fed also released their latest projections on where they see the inflation rate, and the economy as a whole, throughout the rest of the year. The below dot graph includes the FOMC’s projections on where they see the benchmark interest rate for the current year, and into 2025 and beyond.
For comparison, here is the graph that the FOMC provided in March of this year.
It’s clear now that the FOMC expects interest rates in the current year to peak around 5.6%, instead of the previously predicted 5.1% peak, which is where we are currently. This means that we can reasonably expect the Fed to raise interest rates by a quarter of a point at least two more times this year. The Fed could decide to raise the interest rate by a full half point in one meeting, but this seems unlikely, given the rapid increase in interest rates, with 10 consecutive interest rate increases, and jumping five percent since last March. Additionally, the Fed expects the benchmark rate to decrease to 4.6% in 2024. In more positive news, however, the Fed expects the overall economy to see stronger growth than initially forecasted, with a 1% forecasted growth this year, up from the 0.4% increase in March.
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