Fed Holds but Projects More Hikes to Come

With unanimity, the Federal Open Market Committee held the federal funds rate in its current range, but updated projections suggest this rate-hike cycle is not yet over.

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The Federal Open Market Committee (FOMC) held the federal funds rate in the 5% to 5.25% range, the first meeting since February 2022 during which the Federal Reserve didn’t raise rates. The decision was unanimous and was widely expected by the markets.

Updated Fed projections suggest the rate-hike cycle is not yet over, however. The updated “dot-plot” projects a year-end 2023 fed funds rate in the 5.5% to 5.75% range, or an additional 0.5% (50 basis points) in rate hikes later this year. While the Fed “skipped” a hike at this meeting, it signaled that more hikes are likely.

The statement was mostly unchanged, highlighting that economic activity has continued to expand at a modest pace, unemployment remains low, and inflation remains elevated. There was one minor tweak in the statement that further supports the case for more hikes—the statement now says that the committee will determine “the extent of additional policy firming that may be appropriate” to get back to 2% inflation. The previous statement said that the committee will determine “the extent to which additional policy firming may be appropriate” to reach their inflation target. It’s a minor change but suggests that the question is now “how much” the Fed will hike rates going forward, rather than “if” it will hike rates.

Taking the statement, updated economic projections, and Fed Chair Jerome Powell’s comments at the press conference together, this highlights the Fed’s determination to bring inflation down by leaving open the option to hike rates more if needed.

Updated dot-plot and economic projections

This FOMC meeting was accompanied by the updated Summary of Economic Projections, with the dot-plot likely drawing the most attention. The dot-plot provides the projection of each FOMC participant for the fed funds rate at the end of each year.

The median projection for the year-end 2023 fed funds rate is now 5.625%, or in the 5.5% to 5.75% range. That suggests an additional two 25-basis-point rate hikes this year, or one 50-basis-point hike should the committee prefer to raise the rate more quickly. The new year-end 2023 projection is a half a percentage point (0.5%) higher than the projection from the March meeting.

The 2024 and 2025 year-end rates were increased as well but still suggest rate cuts nonetheless. The median year-end 2024 projection was increased to 4.625% from 4.275%, and 2025 was raised to 3.375% from 3.125%.

The dot-plot projects more rate hikes this year. Chart shows the latest dot-plot, which reflects the estimates of each voting member of the FOMC and where they think the federal funds rate target should be at the end of 2023, 2024, 2025, and longer-term. Source: Federal Reserve Board, 6/14/2023.

Note: Each shaded circle indicates the value (rounded to the nearest 1/8 percentage point) of an individual participant’s judgment of the midpoint of the appropriate target range for the federal funds rate or the appropriate target level for the federal funds rate at the end of the specified calendar year or over the longer run. One participant did not submit longer-run projections for the federal funds rate.

Elevated inflation and the strength of the labor market are two key reasons the Fed may continue to hike rates, and that was reflected in the updated economic projections. Most of the large revisions to the Fed’s economic projections were for this year, with very little change to the economic projections for 2024 and 2025.

The median year-end projection for the core Personal Consumption Expenditures (PCE) index, one of the Fed’s preferred inflation gauges, rose to 3.9% from 3.6% in March. Core PCE (minus volatile food and energy prices) remains stubbornly high and has proven stickier than anticipated—through April 2023, the year-over-year change was still 4.7%, and it has been stuck in the 4.6% to 4.8% range since November 2022. That’s well above the Fed’s 2% target, and Powell specifically called out its elevated level in his press conference.

The median projection for the unemployment rate at the end of this year was revised to 4.1% from 4.5%, and the economy is projected to grow more this year than initially projected. With an unemployment rate still at just 3.7% at the end of May, Fed officials have mentioned the need to see labor conditions loosen to bring down spending and consumption and therefore inflation. 

Summary of economic projections. Table shows the FOMC’s median economic projections for a range of economic indicators. Source: Federal Reserve Board, 6/14/2023.

Note: Projections of change in real gross domestic product (GDP) and projections for both measures of inflation are percent changes from the fourth quarter of the previous year to the fourth quarter of the year indicated. PCE inflation and core PCE inflation are the percentage rates of change in, respectively, the price index for personal consumption expenditures (PCE) and the price index for PCE excluding food and energy. Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated. Each participant’s projections are based on his or her assessment of appropriate monetary policy. Longer-run projections represent each participant’s assessment of the rate to which each variable would be expected to converge under appropriate monetary policy and in the absence of further shocks to the economy. The projections for the federal funds rate are the value of the midpoint of the projected appropriate target range for the federal funds rate or the projected appropriate target level for the federal funds rate at the end of the specified calendar year or over the longer run. For each period, the median is the middle projection when the projections are arranged from lowest to highest. When the number of projections is even, the median is the average of the two middle projections. Longer-run projections for core PCE inflation are not collected.

In addition to the potential for more rate hikes this year, the Fed is continuing with its balance sheet reduction plans, also called quantitative tightening (QT). While that has generally been running in the background, it’s still a form of tightening. Because the Fed allowed maturing securities to roll off its balance sheet, the Fed’s Treasury holdings have declined by more than $600 billion, and its mortgage-backed securities holdings have shrunk by roughly $180 billion.

In sum

Although the Fed held its benchmark rate steady for the first time since early 2022, additional rate hikes do seem likely. The Fed is keeping its options open, however, and updated projections don’t guarantee additional hikes down the road. Powell suggested there was no discussion at this meeting about what the committee might do at the July meeting and stated that the updated dots shouldn’t necessarily be viewed as an expected “plan.”

He also said that the decision to hold rates steady was a continuation of the process in which the Fed has moderated the magnitude of rate hikes. This gives the committee time to evaluate the inflation and labor market landscape before the next meeting.

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