We expect the Federal Reserve to hike the federal funds rate by 25 basis points to a range of 5% to 5.25% at its May 3 meeting, with changes in the Federal Open Market Committee statement that imply a possible pause in the rate hike campaign and a bias toward future tightening if inflation proves sticky and stubborn.
Beyond the 10th consecutive rate hike, investors and policymakers alike will be focused on language in the FOMC statement around use of the previously used phrase “some additional policy firming” in the Fed’s paragraph on policy. The committee will likely alter that phrase by changing “some” to “any,” signaling flexibility on the future course of rate hikes and setting the stage for a possible strategic pause in the central bank’s efforts to restore price stability.
In the press conference following the statement from the FOMC committee, Fed Chair Jerome Powell will likely eschew any idea that a rate hike pause is a foregone conclusion; however, the language put forward in both the statement and the presser will likely set the stage for a one-month period where hawks and doves will duke it out over the June policy decision. We believe that a rate hike at the June meeting remains a distinct possibility given the evolution of wage data inside the government’s Employment Cost Index and elevated inflation.
The press conference will almost certainly feature an attempt by Powell to communicate that any prospective pause in the rate hike campaign does not signal that the Fed is calling an “all clear” on the inflation fight. Rather, it simply reflects the need for the economy to catch its breath after 10 straight rate hikes and the desire for the FOMC to ascertain the lagged impact of past rate hikes on the real economy.
In addition, we expect aggressive questioning by the financial media around recent financial turmoil inside small- and medium-sized banks and the supervisory failures at the Fed surrounding Silicon Valley Bank, as well as any issues that may arise due to ongoing problems at First Republic Bank between the time of the publication of this research note and the FOMC Meeting.
