Fed pauses rate hiking cycle

The press conference was, however, more hawkish than expected

14 June 2023

Much to no one’s surprise, the Federal Reserve decided to skip hiking this month (even if Chairman Powell was keen to stress this was not a skip). The accompanying statement and press conference was, however, more hawkish than expected with the Fed expecting two additional hikes this year to tame inflation, which it expects to move higher again. Powell expressed that the committee was surprised about the resilience of current inflation, even if yesterday’s CPI print showed a continued slowing in the headline inflation rate. One has to wonder how data dependent the Fed seems to be. Admitting to being surprised that its policy to date has not cooled a hot jobs market is basically a signal that higher rates are indeed even more necessary and can be withstood by the economy as it glides, according to the Fed, into a soft landing.

Today’s hawkish commentary in the press conference was all a bit strange – growth projections and inflation projections upgraded and the hawkish messaging should have probably been accompanied by a hike. There seems to be some dissonance here. Powell’s commitment to getting inflation back to goal means he does not expect rates to come down for a “couple of years”. I wouldn’t be surprised if this hawkish pessimism ends up being not too dissimilar to his dovish optimism that inflation spiking in 2021 was a transient issue.