Fed Plans Delayed Rate Hike Postpones June Said WSJ Renewal

WSJ Renewal report.- Federal Reserve officials are indicating an increased likelihood of maintaining interest rates at their June meeting before proceeding with a subsequent hike later in the summer.

In recent days, investors had anticipated a rate increase during the June 13-14 meeting, prompting two policymakers to publicly express their preference to forego the hike unless there is an outstanding jobs report on Friday.

This strategy allows officials more time to assess the economic impact of the Fed’s previous ten consecutive rate increases, as well as recent banking stress, by spacing out future hikes. Since March 2022, they have raised rates by five percentage points to combat high inflation, with the most recent increase on May 3 bringing the range to 5% to 5.25%, reaching a 16-year high.

Fed governor Philip Jefferson emphasized that deciding to hold the policy rate steady at an upcoming meeting should not be interpreted as reaching the peak rate for this cycle. Skipping a rate hike would enable the committee to gather more data before making decisions on additional policy firming.

Philadelphia Fed President Patrick Harker, another member of the Federal Open Market Committee (FOMC), also supports keeping rates steady in June. He suggested that if tighter measures were needed, they could be implemented every other meeting, allowing for a skip in June. WSJ Renewal reported.

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Fed Chair Jerome Powell laid the groundwork for skipping a rate increase during a public appearance on May 19. He acknowledged the progress made in policy tightening but highlighted the uncertainty surrounding the lagged effects of previous tightening and recent banking stresses. Powell emphasized the importance of carefully assessing data and the evolving outlook.

While some central bank officials favored continuing to raise rates due to higher-than-expected inflation and economic activity, others remained open to either an increase or a skip. Investors in interest-rate futures markets had anticipated a June rate increase but lowered the probability after the comments from Jefferson and Harker. However, the mixed messages pose challenges for the Fed, as forgoing an expected increase may send a confusing signal about their commitment to reducing inflation.

The recent discussions reflect potential difficulties in decision-making within the policy-making committee. While there has been little public disagreement in the past year, upcoming deliberations around tactics could be challenging.

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In early March, the Fed indicated the need to raise rates to around 5.5% to bring inflation back to their 2% target. However, the run on deposits at Silicon Valley Bank in March disrupted this plan, leading officials to consider that a potential credit crunch could substitute for rate increases.

Banking stresses have since eased, and economic activity has not shown significant evidence of negative impacts from tighter lending standards. Despite this, some officials retain skepticism about skipping a rate increase and state that when they deem higher rates necessary to slow the economy, the proceeding is advisable.

The evolving strategy of potentially skipping the June hike suggests that more officials may consider a July increase appropriate, which would raise the median projection of the peak rate to around 5.4%, the highest in 22 years, said WSJ Renewal.

Investors currently predict a 65% chance of at least one rate increase by July. A reasonable compromise for the divided committee could be to skip the June meeting and establish a strong case for a hike in July.

The Fed will release new projections at the June meeting, offering additional insight into their plans.