Fed, or read between the lines…

In line with common expectations, Federal Open Market Committee (FOMC), unanimously decided to raise interest rates by 25 basis points, bringing the target range for the federal funds rate to 5,00%-5,25%, the highest level since 2007, from near zero at the start. The committee raised interest rates by 500 basis points from March 2022, the fastest rate of monetary policy tightening since the early 80s.

Economic growth will slow down

Explaining its decision to increase the target range again, the FOMC noted that "there has been significant job gains in recent months, while the unemployment rate has remained low, while inflation remains high." This characterization of the current state of the US economy is essentially unchanged from the March 22 statement. In light of the recent turmoil in the US banking system, the Fed continues to believe that “the banking system is sound and resilient”as in March this year. The FOMC felt turmoil "likely to tighten credit conditions". Yesterday's statement suggested that credit conditions had indeed tightened, which "is likely to affect economic activity, employment and inflation." In other words, the FOMC seems resigned to the fact that economic growth will be weakened in the coming quarters.

Key changes to the message

The most notable part of yesterday's statement, however, was the section outlining the outlook for Fed policy, which toned down the language about the need for additional monetary policy tightening. In its communiqué of March 22, the Committee stated that "provides for some additional monetary policy strengthening that may be appropriate...". In a statement released yesterday, the FOMC dropped the word "anticipates" and simply said "when determining the extent to which additional policy strengthening may be appropriate." In other words, additional tightening may be needed.

Chairman Powell said in his opening address to the post-meeting press conference that:

"We are ready to do more if more monetary policy restraint is warranted."

But the FOMC does not appear to be pre-committing to another rate hike on June 14. This decision will largely depend on "economic and financial developments" over the next six weeks. The committee will also continue to assess the "cumulative tightening of monetary policy" it has already undertaken, as well as the "lags with which the Fed's monetary policy affects economic activity and inflation."

Fed signals 'hawkish pause'?

So it seems that the FOMC is signaling a hawkish pause in the tightening cycle. This means the Fed could clearly raise rates again, especially in light of the statement's reiterated phrase that Committee members remain "highly attentive to inflation risks." However, the bar until June 14 seems to be set higher than in previous meetings. Therefore, there are many indications that the FOMC will indeed remain on hold on June 14. Most likely, by the time of the meeting on July 26, the incoming data on economic activity will be so mild that the Federal Open Market Committee will hold off on the decision again. There are also signs that real GDP will start to contract, albeit at a gradual pace starting from the third quarter. As the economic slowdown and as Fed increasingly convinced that inflation is moving back towards 2% y/y on a sustainable basis, the FOMC is expected to begin its easing cycle late this year/early next year.

To sum up, I would describe yesterday's meeting as "hawk pause".