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United States Monetary Policy June 2023

United States: Fed keeps rates unchanged in June

At the meeting on 13–14 June, the Federal Open Market Committee (FOMC) left the federal funds rate at 5.00%–5.25%.

The decision was driven by the desire to assess the impact of the 500 basis points of tightening since early 2022. The move came against a backdrop of falling price pressures—in May, inflation fell to less than half of its mid-2022 peak and undershot market expectations. Moreover, the Fed judged that tighter credit conditions would weigh on economic activity, employment and inflation ahead.

Looking ahead, despite the decision to hold, the Fed’s own board members expect two additional hikes by end-2023 in order to rein in stubbornly high core inflation. For now, our Consensus is for rates to end their year around their current level, although forecasts are likely to be revised up in light of the Fed’s surprisingly hawkish guidance.

Commenting on the outlook, Nomura analysts said:

“We now forecast an additional 25bp rate increase in July, up to a terminal rate of 5.375%. We had previously expected rates to remain unchanged through year-end. A second hike in November is possible. However?, in our view, slowing inflation and deteriorating growth could be enough to keep the Fed on hold in Q4.”

In contrast, ING analysts are move dovish:

“July is a ‘live’ meeting, according to Powell, but a one-meeting pause makes little sense given the long lags involved with monetary policy. With the disinflationary trend set to accelerate, we see an extended pause.”

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