Ending the most aggressive series of rate hikes in history at the end of the June 13-14 meeting of the Federal Reserve’s Federal Open Market Committee (FOMC) paused raising the nominal interest letting it stand at a range of 5.00% to 5.25% due to the continued easing—but not taming—of inflation which the FOMC is “strongly committed” to returning inflation to its 2% objective.
This concludes the most aggressive series of consecutive hikes in history which consisted of 10 straight rate hikes over 15 months. Since the rate hikes began, the FOMC raised rates in March 2022 (+25 points), May 2022 (+50 points), June 2022 (+75 points), August 2022 (+75 points), September (+75 points), November 2022 (+75 points), December 2022 (+50 points), February 2023 (+50 points), March 2023 (+25 points), May 2023 (+25 points) and now June ( +0 points). This is equivalent to a rise of 5.00 percentage points over the last year.
The next FOMC meeting occurs July 25-26, 2023. Currently, they meet eight times a year—emergency meetings notwithstanding.
In a prepared statement released at the end of the meeting, the committee said:
“Recent indicators suggest that economic activity has continued to expand at a modest pace. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated.”
“The U.S. banking system is sound and resilient. Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks.”
“The Committee seeks to achieve maximum employment and inflation at the rate of 2% over the longer run. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 5.00% to 5.25%. Holding the target range steady at this meeting allows the Committee to assess additional information and its implications for monetary policy. In determining the extent of additional policy firming that may be appropriate to return inflation to 2% over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2% objective.”
“In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.”
“As expected, the Federal Reserve announced a pause on interest rate hikes today. The Fed has been trying to find a narrow path by which to bring inflation down without sending the economy into recession. After 10 straight interest rate increases, the central bank has pressed pause, indicating a willingness to see if they have done enough to tackle inflation.”
“The May CPI report indicated that inflation hit the lowest level in more than two years. Particularly notable was the lower growth in the price of services, an area where prices have been slowest to come down and where the Fed worried inflation might become entrenched. The problem is, however, that inflation is still above the Fed’s 2% target. And prices are still rising fast in many sectors, including the housing sector.”
“Stubborn inflation has raised the question of whether the 2% target is even appropriate. It is extremely unlikely that the Fed will back down from that goal, since they have been out so forcefully and consistently with the intent to reach that milestone. As a result, we’re probably going to see the Fed resume rate increases at its next meeting, which could raise the probability that the economy will head into a mild recession if not later this year, then by the beginning of next year.”
“The Federal Reserve aims to lower consumption demand by setting the federal funds rate at just the right level—not too hot, not too cold, but just ‘tight.’ After 10 consecutive interest rate hikes, the Fed might be ready to hit pause. The market implied probability of a Fed pause in June is now 94%. While the Fed may pause rate hikes at its June meeting, it’s likely that the FOMC Summary of Economic Projections may signal that another rate hike is still in the cards.”
“If the Fed halts interest rate hikes, it will be able to assess the cumulative effects of previous rate hikes on inflation and the broader economy. Moreover, continuing instability in the banking sector may lead to credit tightening, which would act in a similar manner to a rate hike by reducing lending and dampening demand. However, the labor market remains tight. According to the latest JOLTS report, job openings increased from 9.7 million in March to 10.1 million in April, while job openings exceeded total hires by 4 million, indicating that employers are still struggling to fill vacancies as labor demand outstrips supply.”
“Inflation and the labor market are not responding as the Fed expected, according to the FOMC’s latest Summary of Economic Projections. The unemployment rate ticked up to 3.7% in May, while the March FOMC projections expected the unemployment rate to reach 4.5% by the fourth quarter of 2023. The Fed also expected core PCE to decline to 3.6% year-over-year by the fourth quarter, yet it remained at 4.7% as of April. In both cases, nearly an entire percentage point for each indicator is a wide gulf to cross in the next six months and unlikely to happen at the current pace of change without a significant shift in economic conditions. The Fed remains data dependent. More months of above-expectation economic indicators increases the likelihood that more rate hikes are ahead.”
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Lisa D. Cook; Austan D. Goolsbee; Patrick Harker; Philip N. Jefferson; Neel Kashkari; Lorie K. Logan; and Christopher J. Waller.