During the latest June FOMC meeting, US Federal Reserve decided to keep interest rates unchanged for the first time since March 2022. However, Chairman Powell surprised observers by shifting from a “dovish” to a “hawkish” tone during the post-meeting press conference. He emphasized that the current pause in rate hikes adds flexibility for future actions and is a continuation of slowing down the pace of the current hiking cycle. Future decisions will depend on inflation, labour market conditions, economic uncertainties, and other key economic data. 

From the latest Fed’s dot plot, officials now see the Fed Fund rate peaking at 5.6% this year which is higher than the Fed’s previous March projection of 5.1%. This suggest that Fed could increase rates two more times this year. Given that one of Fed’s dual mandate is to ensure price stability, the FOMC members will likely want to keep interest rates elevated until inflation moves closer to 2%. 

Federal Reserve System has another mandate which is to pursue for maximum employment. During the press conference Powell mentioned that labour market is gradually moving towards balance, but labour supply remains tight. Although non-farm payrolls added 339,000 jobs in May the unemployment rate has increased to 3.7% mainly due to layoffs by large tech companies.ˆ Wall street banks are expected to reach a total job cut of 11,000 by the end of this year.˜ Small and medium sized financial institutions are also facing challenges due to the lack of capital flows and layoffs are expected to be more severe. 

Apart from the concerns stemming from inflation and the labour market, the outlook for the US economy is not optimistic. The Federal Reserve had previously estimated that the US economy would grow by only 0.4% for the year but subsequently raised its forecast to 1%.˘ Recent retail sales and consumer confidence data showed moderate performance, slightly alleviating concerns about the economic outlook. 

Sources:

ˆ https://www.cnbc.com/2023/06/02/jobs-report-may-2023-.html#:~:text=Nonfarm%20payrolls%20in%20May%20increased%20by%20339%2C000%2C%20better,jobless%20rate%20was%20the%20highest%20since%20October%202022
˜ https://www.ft.com/content/e3f25dde-c594-49dd-9605-259ac3e91cfb 
˘ https://edition.cnn.com/2023/04/27/economy/q1-us-gdp-economy/index.html 

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