Fed keeps interest rate unchanged at 5.00-5.25% as widely expected, by unanimous vote. The new economic projections are rather hawkish, with 2023 median rate projections raised to 5.6% (two more 25bps hikes). GDP growth and core PCE inflation were revised higher while unemployment rate was revised lower.

FOMC leaves the door open for more tightening, as “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.:

Fed added that the assessments will take into account information including “readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.”.

In the new economic projections, median federal funds rates for 2023 is raised from 5.1% to 5.6%, indicating two more 25bps hike. Median projections for 2024 was raised from 4.3% to 4.6%, for 2025 raised from 3.1% to 3.4%.

Regarding 2023 median economic projections, real GDP growth was raised sharply higher from 0.4% to 1.0%, unemployment rate sharply lower from 4.5% to 4.1%, core PCE inflation from 3.6% to 3.9%.

In the new dot plot, twelve members penciled in rate hikes to 5.50-5.75% this year, with four expecting rate at 5.25-5.50%, and only two at the current 5.00-5.25%.

Full FOMC statement here.

Full economic projections here.

Yesterday’s cooling US consumer inflation data in May provided further solid ground for Fed to bypass tightening at today’s rate announcement. Fed funds futures now suggest a 95.4% probability of Fed maintaining status quo, holding rates steady at 5.00-5.25%. However, market sentiment leans towards the likelihood of another 25 bps to 5.25-5.50% in July, with over 60% chance.

Yet, these market expectations are not set in stone and could see adjustments based on Fed’s new economic projections. Rewinding to March, the median interest rate stood at 5.1% for 2023. A perusal of the dot plot reveals that only one policymaker anticipated no additional rate hikes from the current level. In contrast, 10 policymakers forecast one more hike, while seven projected two or more. Changes in this balance could provide insights on whether the interest rate will peak at 5.25-5.50%, as currently predicted by the market.

Furthermore, median interest rate is expected to decline to 4.3% in 2024 and then to 3.1% in 2025. Any deviations from these projections could hint at the duration for which the interest rate will remain at its peak and potentially even suggest a timeline for the initial rate cut.

Some readings on Fed:

• Will Fed Pause After 10 Straight Hikes?
• Fed Preview: On Hold
• June Flashlight for the FOMC Blackout Period