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FOMC Preview: Likely 25bp Rate Hike


Most analysts expect the FOMC to raise rates 25 bps at this meeting, increasing the target range for the federal funds rate to 5‑1/4 to 5-1/2 percent.

On the meeting this week from BofA:
“After remaining on hold in June, we look for the Fed to raise the target range for the
Federal funds rate by 25bp in July to 5.25-5.50%. … The more important question is what the Fed says about the path of policy into September and beyond. … We think some of the June CPI weakness was statistical and not real, and look for strong activity and labor market data to mean the Fed hikes again – and for the last time – at its September meeting.”

emphasis addedAnd from Goldman Sachs economists: “A 25bp rate hike is fully priced for the July FOMC meeting next week. The key question is how strongly Chair Powell will nod toward the “careful pace” of tightening he advocated in June, which we and others have taken to imply an every-other-meeting approach. We expect Powell to cautiously avoid implying that the FOMC has already reached an agreement but are confident that he does want to slow the pace and that the FOMC will end up skipping in September.”

Projections will not be released at this meeting. For review, here are the June projections.  Since the last projections were released, the economy has performed better than the FOMC expected, and inflation was slightly below expectations.
The BEA reported real GDP increased at a 2.0% annual rate in Q1, and the consensus is that real GDP increased 1.8% annualized in Q2. The FOMC projection for year-over-year growth in Q4 2023 appears low.

GDP projections of Federal Reserve Governors and Reserve Bank presidents, Change in Real GDP1
Projection Date202320242025
June 20230.7 to 1.20.9 to 1.51.6 to 2.0
March 20230.0 to 0.81.0 to 1.51.7 to 2.1

1 Projections of change in real GDP and inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated.

The unemployment rate was at 3.6% in June. To reach the mid-point of the FOMC projections for Q4 2023, the economy would likely have to lose a significant number of jobs in Q3 and Q4.   The FOMC’s unemployment rate projection for Q4 appears high.

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents, Unemployment Rate2
Projection Date202320242025
June 20234.0 to 4.34.3 to 4.64.3 to 4.6
March 20234.0 to 4.74.3 to 4.94.3 to 4.8

2 Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

As of May 2023, PCE inflation increased 3.8 percent year-over-year (YoY), down from 4.4 percent YoY in April, and down from the recent peak of 7.0 percent in June 2022.  A year ago, June 2022 PCE inflation was very high, and YoY PCE inflation will likely decrease further in June.

Inflation projections of Federal Reserve Governors and Reserve Bank presidents, PCE Inflation1
Projection Date202320242025
June 20233.0 to 3.52.3 to 2.82.0 to 2.4
March 20233.0 to 3.82.2 to 2.82.0 to 2.2

PCE core inflation increased 4.6 percent YoY, down from 4.7 percent in April, and down from the recent peak of 5.4 percent in February 2022.; This remains a concern for the FOMC, however this includes shelter that was up 8.3% YoY in May (even though asking rents are mostly unchanged YoY). 

Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents, Core Inflation1
Projection Date202320242025
June 20233.7 to 4.22.5 to 3.12.0 to 2.4
March 20233.5 to 3.92.3 to 2.82.0 to 2.2

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