US Federal Reserve: Interest Rates Prediction for June and July Meetings

Investing.com – It will not raise interest rates for the first time in more than a year at its June 13-14 meeting, according to economists polled by Reuters, but several expect at least one increase this year.

Federal Reserve Chairman Jerome Powell indicated in May that the US central bank may soon pause a rate hike cycle to assess the impact of previous 500-point hikes, having raised interest rates at every meeting since March 2022.

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More than 90% of economists, 78 of 86, surveyed from June 2-7 said the policy-setting Federal Open Market Committee would keep its federal funds rate at 5.00%-5.25% at the end of its meeting next week. The remaining eight expect an increase of 25 basis points.

Since the Fed’s last policy meeting in May, strong economic data and commentary from a few of its officials has encouraged markets to anticipate a rate hike at or before the July 25-26 meeting, with earlier expectations of a rate cut later this year receding.

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This drastic change in market expectations helped lift the US dollar to its highest level since March.

The problem is that inflation has not fallen fast enough – it rose in April at 4.4%, and 4.7% when stripped of volatile food and energy prices. It is worth noting that the inflation target of the Central Bank is to reach the rate at 2%.

“Powell expressed his bias in favor of a June peg, as that would give them an extra month of data to look at, although I seriously doubt if that would give them any new insights,” said Philip Marie, chief US strategist at Rabobank.

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Meanwhile, the US labor market remained remarkably strong, with unemployment rising but remaining well below 4%, and wage inflation slowly declining.

And the housing market, which is usually very sensitive to interest rates, has withstood rising borrowing costs for much longer than many expected, with prices falling only modestly from levels seen during the pandemic-related boom.

US Treasury Secretary Janet Yellen said on Wednesday that the economy remains strong amid robust consumer spending but that some areas are slowing, and that she expects continued progress in reducing inflation rates over the next two years.

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Recession fears receded

More than a third of respondents, 32 of 86, say the Fed will raise rates at least one more time this year, including eight who say it will happen in June and 24 who expect a rate hike in July after fixing it in June. Only one predicted an increase in each of June and July.

If the Fed decides to raise rates in June, it will follow in the footsteps of the Bank of Canada, which surprised markets on Wednesday by raising its key benchmark overnight rate by 25 basis points, to 4.75%, where it was expected to hold.

The Canadian move follows a surprise 25 basis point increase on Tuesday by the Reserve Bank of Australia.

Just over 25% of economists in the poll, 23 of 86, expected at least one Fed rate cut by the end of 2023, but this is down from 28% in the last poll. Markets are pricing in a 60% chance of a rate cut this year.

The US Labor Department is scheduled to release inflation data on June 13, the first day of the Fed’s meeting.

“There isn’t much economic difference between raising interest rates in June or doing so in July,” said Andrew Hollenhorst, chief US economist at Citi. Andrew expects an increase of 25 basis points in the June and July meetings.

“If most Fed officials feel that another hike of at least 25 basis points would be necessary, it seems simpler to advance that hike in June than to hold it,” he added.

Less than 60% of respondents to an additional question, 28 of 48, said America would fall into a recession this year, compared to more than 70% in a poll just a few weeks ago.

Although the poll forecasts the economy contracted by 0.4% and 0.5% in the last two quarters of this year, respectively, that alone wouldn’t necessarily mean a recession.