June flashlight for the FOMC blackout period

Summary

After raising rates by 500 bps since March 2022, the FOMC signaled at the conclusion of its previous meeting on May 3 that the tightening cycle may be coming to an end. That said, the Committee was careful to keep its options open regarding further tightening.

Economic data that have been released after the previous FOMC meeting have generally been stronger than expected. In addition, financial conditions have been little changed since the May meeting. Consequently, some Committee members have indicated their preference to raise rates further on June 14.

However, some key FOMC members, including Chair Powell, FOMC Vice Chair Williams and Governor Jefferson, seem content to leave policy unchanged at next week's meeting to allow more time for past rate hikes to filter through to the economy.

We see the most likely outcome for next week's meeting as the FOMC making no change to its policy rate, but making clear that another hike at its July 26 meeting remains a distinct possibility. This combination would allow a compromise between officials who believe further tightening is necessary and those who believe it is time to be patient and let the medicine of the past year fully take hold.

The FOMC will release its quarterly Summary of Economic Projections (SEP) at the conclusion of its meeting on June 14. We think the median "dot" for year-end 2023 will shift up by 25 bps relative to the March SEP. If so, then most FOMC members would be indicating that the target range for the federal funds rate needs to go at least 25 bps higher from its current setting of 5.00%-5.25%. We think the median dots for 2024 and 2025 will also rise by 25 bps each to reflect a similar pace of eventual policy easing, as was the case in the March projections.

We think most Committee members will bring down their forecasts of where they think the unemployment rate will end 2023, while nudging up their outlooks for GDP growth this year. We do not expect meaningful changes to the Committee's inflation projections.

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