The upcoming Federal Open Market Committee (FOMC) meeting has attracted significant attention from officials and market participants, with the introduction of the term “skip” adding a new dimension to the discussion. However, the distinction between a “skip” and a hawkish hold remains somewhat unclear, leading to speculation about the potential implications. It will be interesting to see if this new jargon finds its way into the Fed’s statement or Chairman Powell’s remarks. In this article, we examine three key channels through which the Fed could express its tightening bias while maintaining the status quo.
Chairman Powell is expected to play a pivotal role in conveying the Fed’s stance. It is likely that he will emphasize that the decision to hold rates at the current meeting should not be seen as a conclusive indicator for future meetings. He will likely stress the Fed’s commitment to responding to incoming data to ensure the attainment of its inflation target and the preservation of its intended trajectory. The upcoming release of the Summary of Economic Projections by the Fed is expected to include revisions to key projections. The median growth forecast is likely to surpass the previous estimate of 0.4%, indicating a more positive outlook for the economy. Additionally, the median unemployment forecast is expected to be revised downward, reflecting an improvement in the employment situation. There may also be a slight increase in the median year-end Fed funds forecast from its current level of 5.1%. It’s worth noting that the March projections suggested a potential rate cut if inflation were to fall below 2%. There is a possibility of dissent among regional presidents regarding a rate hike. Minneapolis Fed President Kashkari, known for his past dissent, is the most probable candidate. Dallas Fed President Logan has expressed reservations but may exercise caution as a newer member of the Fed.
The May Consumer Price Index (CPI) report has played a significant role in shaping market expectations regarding the FOMC decision. Although the headline CPI showed a slight deceleration compared to expectations, the core rate exhibited a modest increase. Consequently, the likelihood of an immediate rate hike decreased, with futures markets indicating odds of around 10% at the time. Furthermore, the probability of a July hike was downgraded to approximately 70% from the previous 87%, as investors considered the impact of the base effect on the US CPI, potentially resulting in a low 3% range for the next meeting in July.
Looking ahead, If the US CPI maintains its trajectory and remains in the low 3% range by the end of July, coupled with signs of an economic slowdown, it could pose difficulties for the Fed to resume its tightening path. Additionally, the year-end average effective Fed funds rate is projected to be around 5.11%. The average effective rate has remained steady at 5.08% since the last rate hike. These factors, combined with the sentiment reflected in the Fed funds futures market, which suggests that the Fed’s tightening cycle has concluded, further emphasize the challenges faced by the central bank.
As the FOMC meeting takes center stage, the inclusion of the term “skip” in discussions has added an element of uncertainty to the analysis of the Fed’s stance. The three identified channels—Powell’s communication, the Summary of Economic Projections, and the potential for dissent will provide insights into the Fed’s tightening bias while maintaining current rates.