Will the Fed Pause or Raise Rates in June?

Examining the Likely Course of Action for the Federal Reserve

Economic Factors Impacting the Fed’s Decision

Ahead of the Federal Reserve meeting next week, I wanted to talk about the potential for the Federal Reserve to pause its rate hikes. The Federal Reserve has raised its benchmark interest rate 10 months in a row since March 2022, and has taken the rate a full five percentage points higher than it was when it first began its fight against inflation in March of last year. Amid new economic conditions and data, however, the Fed is expected by many economists to leave rates where they currently stand at next week’s meeting. The Fed will announce its decision on whether to pause the interest rate hikes, or another increase on Wednesday, June 14th at 2:30 PM EST. We’ll examine the reasoning behind their previous rate hikes, what has happened to change their approach now, and what language the Fed has been using to indicate a potential pause.

Reasoning Behind Recent Rate Hikes

As I have covered before in some of my previous blogs regarding the Federal Reserve and the interest rate hikes, the main driver of the increase in rates has been the Fed’s campaign to stamp out the rising inflation rate. In May of 2022, the Consumer Price Index, which measures the national inflation rate, was at 8.3% and is currently at 4.9% as of April 2023, which is the latest measurement available. The Fed’s goal is to ultimately get the inflation rate down to 2%, and it has used the benchmark interest rate as the main method of driving down the inflation rate. The effects of raising the benchmark interest rate, however, is something that has long-term effects that are not immediately felt in the economy. It takes a while for these effects to ripple through the banks that they most directly affect, so the Fed has to be very careful with how quickly they increase the rates.

 Economic Factors Influencing the Fed’s Decision

While the Fed does want to wait and see the long-term effects of its interest rate hikes, there are a number of other factors that have an influence on whether the Fed will pause or raise interest rates. One of the biggest concerns that could prompt the Fed to pause their rate hikes, is the fear of pushing the economy into a recession. If the Fed were to push interest rates too high, too quickly, it could tip the economy into a recession. This reasoning is strengthened by the string of bank failures that occurred earlier this year, with the collapse of Silicon Valley Bank, Signature Bank, and First Republic. On the other hand, the Fed has maintained its position of being extremely data-driven with its decision-making process, and recent releases of economic data are showing an extremely stubborn level of inflation, and an increase in retail spending and jobs across the country. A May employment report exceeded expectations and reported that employers added 339,000 jobs across a large set of industries nationwide, along with the Personal Consumption Expenditures Price Index, also known as PCE, reading a .2% increase from March to April. The PCE index reflects the “changes in prices of goods and services purchased by consumers in the United States”, according to the Bureau of Economic Analysis’ website, and is the Fed’s preferred inflation metric.

What Members of the Federal Reserve Are Saying About the Next Meeting

 With all of these factors to consider, it’s important to hear from economists on what they believe will occur at next week’s Federal Reserve meeting. Philip Jefferson, a member of the Fed’s Board of Governors, which is the board that decides whether to increase, pause, or decrease the benchmark interest rate, noted that

“History shows that monetary policy works with long and variable lags, and that a year is not a long enough period for demand to feel the full effect of higher interest rates.” 

Raphael Bostic, the president of the Federal Reserve Bank of Atlanta, spoke at a conference in Florida, saying,

“We haven’t gotten to the hard part yet … There’s going to be tension and pressure and stress coming from a lot of different circles, and we are all collectively going to have to … be willing to be resolute and hold the course.” Bostic also commented to CNBC, saying that “inflation is not going to come down very quickly, if there’s going to be a bias toward action, for me it would be a bias to increase a little further as opposed to a cut.”

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