A Hawkish Skip at the Fed

In this past Sunday's QT, we wrote: "On Wednesday, Fed Chair Jerome Powell will update us on the committee's latest views. Odds are the FOMC will skip another rate hike, but hint that rate hiking might not be over." Sure enough, the FOMC skipped and the committee's statement noted: "Holding the target range steady at this meeting allows the Committee to assess additional information and its implications for monetary policy."

The FOMC's latest Summary of Economic Projections (SEP)shows the federal funds rate rising to 5.6%, up from the 5.1% projected in the December and March SEPs (table). That implies two more 25bps rate hikes before the end of this year. No one on the committee expects a rate cut this year. In his press conference today, Powell said that the core inflation rate remains sticky and too high. He wants to see more progress in getting it down. The SEP shows the core PCED at 3.9% this year, up from the March SEP projection of 3.6%. However, the committee still expects this inflation rate to fall to 2.2% in 2025.

At the May meeting, the Fed's staff projected a mild recession. However, the committee actually raised its projection of economic growth with real GDP up 1.0% this year versus the March estimate of 0.4%. That's a soft landing in our view and is consistent with our forecast.