‘Higher for Longer’: Fed’s June Rate Pause Presages Anticipated Future Hikes, Economists Warn
CC0 / /
Subscribe
Even though the Federal Reserve has decided not to raise interest rates this month, the economic projections it released on Wednesday show the central bank anticipates trouble on the horizon, economists told Sputnik.
The Federal Reserve declined to raise interest rates at its June meeting on Wednesday, following a report showing the US dollar was at its lowest inflation rate in more than two years. However the central bank didn’t say that there wouldn’t be any rate hikes in the future.
Michael R. Englund, principal director and chief economist for Action Economics, told Sputnik on Wednesday that the Federal Open Market Committee (FOMC), which makes the Fed’s policy decisions, was adopting a policy of “walk loudly and carry a small stick.”
“The FOMC policy statement and associated summary of economic projections revealed both a policy pause and surprisingly hawkish mix of higher forecasts for GDP, inflation, and the Fed funds rate over the Fed’s three-year forecast horizon,” he said. “This mix of a dovish policy action but a hawkish twist to the SEP projections and commentary could be seen as reflecting a Fed effort to ‘walk loudly and carry a small stick.’”
He noted that in the Summary of Economic Projections (SEP) released with the Wednesday statement, the Fed increased its expectations for US economic growth in 2023, but barely touched those for 2024 and 2025. Its predictions for the path of the unemployment rate received similar treatment.
“Surprisingly, we saw only slight trimmings for the headline PCE [personal consumption expenditures] chain price forecasts in 2023, with offsetting boosts in 2024 and 2025. More importantly, the core PCE chain price forecasts were raised sharply in both 2023 and 2024, with slight additional boosts in 2025,” Englund said.
“The FOMC dot plot revisions revealed big upward shifts in the Fed funds rate medians, central tendencies, and ranges across the 2023-25 forecast horizon, despite the June policy pause. The medians show two additional quarter point hikes in 2023 that leave a 5.6% (was 5.1%) median for Q4 of 2023, while future median rate projections were boosted by about one quarter-point hike each, to 4.6% (was 4.3%) in 2024 and 3.4% (was 3.1%) in 2025,” he told Sputnik, adding that “the central tendency figures show a slight skewing of rate projections below the median in 2023, but above the medians in both 2024 and 2025, as policymakers are doubling-down on the ‘higher for longer’ mantra.”
Englund explained that only two of the FOMC’s 12 members expected the effective federal funds rate, also called the interest rate, to remain unchanged for the rest of the year. Four of them expected it to increase by another 25 base points, while nine of the board members expected it to rise by 50 basis points, and two expected a 75-basis-point increase before the year is out. One of them expected another full 100-point hike.
At present, the interest rate is at 5.0-5.25%, having been increased by 500 base points since March 2022 as the Fed rushed to respond to record-high inflation.
“Overall, the Fed sees an economy that is outgrowing prior expectations, with big upside impacts from labor market tightness on the headline and core inflation figures, which are expected to sharply outpace the Fed's objectives over the coming two years,” Englund explained. “As such, the Fed now sees a higher trajectory for the Fed funds rate over the horizon, despite the coincident choice to refrain from hiking the Fed funds rate at the June meeting.”
“The market has taken the statement and press conference as mildly hawkish, though commentary has focused on the unusually large gap between the dovish policy choice at the June meeting and the hawkish verbiage and forecast revisions that accompanied it.”
'Cruise Control' Won't Last
Financial and geopolitical analyst Tom Luongo told Sputnik that “we can expect [Fed chairman Jerome] Powell to keep his word and raise at least twice more before the end of the year. He made the point that core inflation hasn’t responded at all to rate hikes. This is your tell.”
“Commodity prices are artificially suppressed right now as President Biden keeps flooding the market with oil from the Strategic Petroleum Reserve, depressing WTI crude prices, which, in turn, are suppressing Brent crude and keeping a lid on commodity prices in general,” he explained, referring to the two predominant crude oil markets.
He noted that with the consumer price index at just 4% and continuing to fall, “the Fed looked at the direction of credit growth and the illiquidity in debt markets and thought it best to put things on cruise control for a few weeks.”
“The problem is most of the CPI is tied to domestic gasoline prices,” he explained. “RBOB [Reformulated Blendstock for Oxygenate Blending] gasoline futures are basing with an upward bias. If they break above $2.60 per gallon, inflation is guaranteed to return in the second half of 2023 and Powell will go on the warpath again. This is what he told us if we had ears to listen.”
Luongo said that when it comes to interest rates, “the big issue is the health of the banking sector. Powell’s aggressive tightening has a lot of banks needing time to digest what has happened and let the maturity profile of their assets (loans) catch up to what they’ve already done.”
“This was the unstated theme of Powell’s press conference and the rest of the FOMC statement: ‘we’re giving the debt markets time to catch their breath and let the underwater assets work through to maturity so banks can lend more profitably at current rates.’ Most commentators simply refuse to understand this, having been trained into this, ‘The Fed is everything’ mindset curated by Powell’s predecessors, [Janet] Yellen and [Ben] Bernanke.”
Luongo said that was why Powell did as he expected and paused the interest rate increases, although at the same time he “put a wooden stake through the hearts” demanding he begin lowering interest rates again.
“Rates will be higher for longer, and those crowing today that this is just a prelude to a return to the zero-bound and QE [quantitative easing] are simply stroking their ego rather than engaging in analysis,” the analyst said.
“Year-over-year CPI monthly increases for last June and July were 1.0 and 1.3% respectively. Headline annualized inflation will drop through July. After that it will begin to rise unless oil prices crash from here, and there is precious little hope of that happening given OPEC’s production cuts and de-dollarization in the global oil markets making it easier for oil to keep flowing despite tight dollar liquidity.”
