FOMC Preview: Banks expect the Fed to maintain the rates unchanged in June, but signal higher rates ahead

At 2 p.m. EDT time on June 14, the Federal Reserve will release the results of its June report, and release the latest quarterly economic forecast and interest rate dot plot. Fed Chairman Powell will hold a press conference later.

Expectations for the June meeting are solidly centered around the Fed keeping interest rates steady for the first time since tightening from March 2022. The Fed seems to prefer monitoring policy lags and regional bank stress for a little longer. Market pricing also favors the Fed's decision, with no full hike priced until the July meeting.

Although FOMC members largely support a skip, each speaker was careful to speak conditionally and leave the door open for a hike in July if the data support it. This will likely be reflected in the FOMC statement, which should maintain language about the potential for additional policy rate firming and the Chair's message at the press conference.

A potential further hike could help prevent unwanted easing in financial conditions after a decision to hold. Moreover, it will allow the Fed to ease the core Inflation and job market to the target level.

The US economy unexpectedly added 339K jobs in May 2023, way above market forecasts of 190K.

However, the CPI number released yesterday showed that inflation is cooling down in May, mainly driven by lower energy prices.

After the release of the CPI data on June 13, the market expects the probability that the Fed will maintain interest rates in June rose to 96.5% from 79.1% the day before.

The Fed's balance sheet steadily declined on the central bank's gradual reductions of Treasuries and MBS. The Emergency lending has declined as well since later March. The Overnight Reverse Repo decreased to 2,074 billion.

FRED data shows recent Treasury General Account went down to 44.76 billion. The rapid decreases raised concern over government refinancing in a high interest rate environment.

The Fed is also monitoring the banking system. Following the Silicon Valley Bank's failure in March, incoming data suggest that Fed actions have largely contained stresses within small and regional banks. This has prevented spillovers and reduced the likelihood of systemic risk. The slowing loan growth does not indicate a credit crunch. The decline in loan growth is mainly in C&I (consumer and industrial) loans. However, loan growth for consumer loans, commercial real estate, and residential real estate loans remains positive.

Although CPI data eased in May, Wall Street institutions look for the median member to upgrade their outlook for growth in real economic activity this year. Despite the three-tenths increase in the unemployment rate to 3.7% in May, Bank of America estimates the unemployment rate path to be revised lower; the analyst also predicts“higher” and “longer” in terms of the median dot for 2023 and 2024.

Source: BofA, trading economics, CME FedWatch, St louis Fed