Will the Fed Really Pause Rates Hikes in 2023?

The Federal Reserve’s recent rate hike decision has some bold implications. Analysts and economists are currently on edge, weary of a potential halt to the central bank’s deflation efforts while also concerned about the impact of the Fed’s historically aggressive tightening on a tenuous U.S. economy. Will the Fed really pause rate hikes in 2023?

The short answer is probably. The Fed has raised rates at just about every opportunity this cycle. Most economists agree it’s unlikely the Fed will continue to push rates up at each of the remaining Federal Open Market Committee (FOMC) meetings this year. Especially with the regional banking and debt ceiling crises continuing to bolster recession fears, adding to general economic growth slowdowns, a dovish slowdown seems a virtual inevitability.

Pedal to the Metal or Ease Off the Gas?

The Fed still has five remaining FOMC meetings this year, each an opportunity to further hike rates. The notion that the Fed will be tempted to hit the panic button at least one more time before year-end is, unfortunately, rather compelling. However, evidence is mounting that, at least at its upcoming June rate hike decision, the Fed will slow down a bit.

In particular, a much-noticed omission from the Fed’s post-meeting statement has significantly increased expectations of a dovish pause. The May FOMC post-meeting statement didn’t contain the line “the Committee anticipates that some additional policy firming may be appropriate,” a point that was notably present in previous statements. While it may seem tertiary to some eyes, Fed Chair Jerome Powell assured economists the omission was very much purposeful. Powell said last week:

“You will have noticed that, in the statement from March, we had a sentence that said the Committee anticipates that some additional policy firming may be appropriate. That sentence is not in the statement anymore. We took that out and, instead, we’re saying that, in determining the extent to which additional policy firming may be appropriate to return inflation to 2 percent over time, the Committee will take into account certain factors. So that’s a meaningful change that we’re no longer saying that we anticipator. and so we’ll be driven by incoming data meeting by meeting. And, you know, we’ll approach that question at the June meeting.”

Now, this isn’t exactly an absolute confirmation of the Fed’s intentions; it has raised analysts’ heart rates to new highs as they consider the possibility that the Fed is preparing to pause its tightening process.

Will the Fed Really Pause Rate Hikes?

Despite Powell’s own narrative, however, a hawkish subversion of expectations is almost a trademark of the Fed at this point. The central bank has raised rates 10 times this cycle, bringing the Federal funds rate to between 5%-5.25%, the most aggressive pace of tightening since the 1980s. Despite this, inflation hasn’t quite arrived at the 2% holy land. Per the March Personal Consumption Expenditures (PCE) report, the Fed-preferred inflation gauge, prices are still up 4.2% from last year. A notable improvement from last summer’s near-7% annual inflation level, to be sure, but given the narrative the Fed has maintained, it also makes it hard to say with any certainty that the Fed won’t pull the trigger at least once in its remaining FOMC meetings this year.

“In determining the extent to which additional policy firming may be appropriate to return inflation to 2 percent 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. We will make that determination meeting by meeting, based on the totality of incoming data and their implications for the outlook for economic activity and inflation. And we are prepared to do more if greater monetary policy restraint is warranted.”

Powell is, as usual, stiflingly enigmatic. He’s refusing to offer even a glimmer of insight into the Fed’s current projections into its upcoming rate decisions, instead opting to play touch and go as economic data continues to release.

Recession Warnings

It seems the Fed is also performing damage control ahead of a potential recession. Indeed, even Powell claimed the baseline forecast is for a mild economic downturn. “So, broadly, the forecast was for a mild recession, and by that I would
characterize as one in which the rising unemployment is smaller than is has been typical in modern era recessions,” Powell said.

At the end of the day, inflation is the end-all-be-all determinant for any potential rate-hike pause. The April PCE report, due May 26, will likely inform the Fed’s path forward, far more than even high-level conjecture. In that regard, onlookers will probably have to do what they’ve been doing: wait and see.

On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

With degrees in economics and journalism, Shrey Dua leverages his ample experience in media and reporting to contribute well-informed articles covering everything from financial regulation and the electric vehicle industry to the housing market and monetary policy. Shrey’s articles have featured in the likes of Morning Brew, Real Clear Markets, the Downline Podcast, and more.

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