InfoMoney: 06/13/2023
Fed’s pause in hikes might come with higher projections and harsher tones, analysts say
Besides the decision, the market will observe if the voting was divided and if the dots graph will bring revision, besides following Powell’s speech
The market consensus suggests that the Federal Open Market Committee (FOMC) is expected to announce a change in strategy on Wednesday (14), opting for a pause in the interest rate hike cycle. This will interrupt a ten-meeting-long upward movement that has added 5 percentage points to the US basic interest rate since last year. However, since the Fed cannot leave room for an interpretation that the pause means a definitive stop, economists see a significant and non-trivial communication challenge ahead. The Fed needs to carefully manage its messaging to avoid any misinterpretation of its intentions and keep markets well-informed about its future policy actions.
Andrea Damico, partner and chief economist of Armor Capital, holds the opinion that a pause now is technically the right move. “This does not affect the Fed’s credibility. We believe it will be a ‘hawkish skip,’ a pause. The Fed will pause, but it will not signal that the tightening cycle is over. It will leave the possibility open that it may resume actions,” she comments, emphasizing that the dominant scenario in the market is that the Fed will vote to raise interest rates in July. This approach allows the Fed to maintain flexibility and keep its options open while providing clarity on its intentions to avoid any major disruptions in the market.
Indeed, due to Armor Capital’s more constructive view on US inflation, their forecast is that the interest rate hike in July will not occur. “In July, the Fed will have the conditions to continue pausing and declare the end of the adjustment. However, it will use the strategy of keeping the market in doubt and even deliver a firm and tough speech,” evaluates Andrea. “It won’t signal that it has stopped for good; it will continue to say that it may raise rates again and use data-dependent communication,” she adds.
