Powell Hits The Brakes After 10 Straight Interest Rate Increases, But Fed Signals More Hikes Coming This Year

Zinger Key Points
  • The Federal Reserve hits the pause button in June, keeping interest rates unchanged at 5%-5.25%.
  • Fed funds are expected to peak at 5.6% in 2023, up from 5.1% forecasted in March, and then to fall to 4.6%, up from 4.3% estimate.

The Federal Reserve held the fed funds rate unchanged at 5%-5.25% on Wednesday, as predicted by the market, marking the first pause in the tightening cycle that began in March 2022.

The rate decision was unanimous.

June FOMC Statement: Key Highlights

“Holding the target range steady at this meeting allows the Committee to assess additional information and its implications for monetary policy,” the Federal Open Market Committee (FOMC) said in the June statement.

The Fed’s statement on its reaction to economic developments is unchanged from May: “the Committee will consider the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, as well as economic and financial developments.”

Fed’s June 2023 Economic Projections: Key Revisions From March

The Fed’s summary of economic projections Wednesday reveals that Fed members are more optimistic on this year’s economic growth than they were in March. They upgraded the estimated change in real GDP from 0.4% to 1% in 2023, and slightly lowered it from 1.2% to 1.1% for 2024. The unemployment rate estimate has been revised down from 4.5% to 4.1% in 2023, and from 4.6% to 4.5% in both 2024 and 2025.

Inflation was revised marginally lower for this year, with the median projection indicating 3.2% PCE inflation in 2023, down from the 3.3% projected in March. For 2024 and 2025, inflation projections held steady. This year’s core PCE inflation was revised higher from 3.6% to 3.9%.

More importantly, the median preference for the federal funds rate at the end of each forecasting period has been revised higher. Fed funds are expected to peak at 5.6% in 2023, up from the 5.1% forecasted in March, and then are expected to fall to 4.6%, up from the 4.3% seen in March. Interest rates are seen at 3.4% in 2025 compared to the previous 3.1%.

Overall, the June’s summary of economic projections shows that Fed board members continue to expect two more rate hikes in 2023, followed by a full percentage point cut next year.

Change in real GDP1.01.11.8
March projection0.41.21.9
Unemployment rate4.14.54.5
March projection4.54.64.6
PCE inflation3.22.52.1
March projection3.32.52.1
Core PCE inflation3.92.62.2
March projection3.62.62.1
Memo: Projected appropriate policy path
Federal funds rate5.64.63.4
March projection5.14.33.1
Source: Federal Reserve

Market Reactions: Stocks Fall, Dollar Rebounds Ahead Of Powell Presser

U.S. stocks tumbled, with the S&P 500, as tracked by the SPDR S&P 500 ETF Trust SPY, dropping 0.7% as of 2:20 p.m. EDT.

The U.S. dollar sharply rebounded, up 0.4%, with the DXY index breaking above 103 levels.

Two-year Treasury yields jumped 9 basis points to 4.76%, while 10-year yields soared 10 basis points to 3.83%.

Don’t Miss Powell’s Press Conference

Read now: Fed’s Tug of War: June’s Pause Masks The Challenges Of A Tricky Balancing Act

Photo via Shutterstock.

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Posted In: Macro Economic EventsTreasuriesTop StoriesEconomicsFederal ReserveMarketsInflationInterest RatesJerome Powell
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