By Theresa Sheehan, Econoday Economist
June 10, 2022
Unless there is a last-minute significant exogenous event, the FOMC is set on lifting short-term rates by 50 basis points at the June 14-15 meeting – and very likely at the meeting or two after that. The most recent comments by Chair Powell and other Fed policymakers put fighting inflation at the forefront of monetary policy. The intent to increase the fed funds target by 50 basis points appears unanimous. There may be one or two on the committee who might like an even more aggressive approach, but these probably won’t dissent given that further increases are on the table and that evidence is emerging the previous rate hikes are having an effect.
The statement that the FOMC releases at 14:00 ET on Wednesday, June 15 will be carefully crafted. Powell has noted the difficulty in giving forward guidance and has said that even a horizon of 60-90 days contains a great deal of uncertainty. There’s also the problem of setting market expectations for further rate hikes without being interpreted as a hard promise. Policymakers have often emphasized that no decision is made prior to the meeting. But given the language of Fed speakers in the intermeeting period, it is a solid bet for a 50-basis-point increase for this meeting and the next on July 26-27. After that, there’s a long stretch until the September 20-21 meeting. Policymakers will have a whole new batch of economic data to consider.
For the moment at least the FOMC can put worries about maximum employment in the background. Data related to the labor market continue to point to very low unemployment and very plentiful job opportunities. The second quarter of 2022 shouldn’t be any problem in that regard. However, hints of economic slowing are beginning to accumulate for consumer activity with lower retail sales – especially big-ticket items – and in homebuying. The most recent Beige Book did not signal a recession but it did point to overall softer conditions for the economy.
This meeting will include an update to the FOMC’s quarterly summary of economic projections (SEP) which is likely to see more revisions than usual as the individual policymakers assess current and future conditions in the US economy. What will get the most attention is changes in the outlook for the fed funds target. There should be a shift of rate hikes into 2022 from 2023 with the target reaching its longer-run expectation sooner. In the March version of the SEP, the longer-run projection was 2.4 percent, a small downward revision from the 2.5 percent in December 2021. It will probably be revised up again. Policymakers have been talking more about reaching the neutral rate – sometimes referred to as the more technical r* — and whether monetary policy needs to exceed that to fight inflation and get it sustainably back toward the 2 percent flexible average inflation target.
This is also the time of year that the Fed begins to prepare its semiannual monetary policy report to Congress. Technically this is done by the Board of Governors, but the June 14-15 meeting will inform the tone and content of the report when it is delivered. This should be around mid-July after which Chair Powell will appear separately before the Senate Banking Committee and the House Financial Services Committee.