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The pause-and-skip Federal Reserve: Powell’s next hike under the radar 

The Federal Reserve takes a breather

After 10 straight months of increase in interest rates by the Federal Reserve, the Federal Reserve’s Open Market Committee (FOMC) voted to pause the aggressive campaign of interest rate hikes. 

The vote to skip the increase in rate was unanimous.

A pause? No. A skip? No. Only a continuation.

Federal Reserve Chair Jerome Powell announced on Wednesday that the Fed has agreed to pause the increase in interest rates. This came after Fed officials voted unanimously to hold interest rates steady in June at the FOMC meeting.

The Fed, in its newly released Summary of Economic Projections, expects that inflation will reach 3.9% by the end of the year. This is up from the 3.6% median projection at the FOMC meeting in March.

The benchmark rate will remain between 5% and 5.25% as a result of the decision. It is the first meeting since January 2022 where the central bank has not hiked the federal funds rate.

At least two additional quarter-point rate hikes were predicted by 12 of the 18 Fed officials. A quarter-point increase had the backing of four. Only two people wanted to maintain rates. The decision-makers also anticipated that their benchmark rate would remain higher than it had been three months ago.

Powell had initially called the decision to pause a “skip” before catching himself. The Chair emphasised that the pause was merely “a continuation” of the Fed’s decision to keep inflation down to 2%.

It doesn’t look like the policymakers will be ready to cut rates this year, or even the next. The chairman said in a press conference that while “it will be appropriate to cut rates at a time when inflation is coming down really significantly, we’re talking about a couple years out.”

What to expect from the Fed?

The Fed has maintained that it may resume increasing rates later this year. Following the news, the market closed with mixed feelings with the Dow Jones Industrial Average slipping by 1%. The S&P 500 fell 0.8% and Nasdaq Composite surged by a tiny 0.4%.

Nvidia rose 4.8%, while Apple gained 0.3%. Microsoft and Micron also added 0.9% and 1.8%, respectively.

At the moment, future hikes depend on what the upcoming months of economic data shows. Powell has argued that it was only prudent to hold steady considering how much the central bank has already dampened economic activity. He also noted that the recent regional banking crisis has also played a role in the decision.

“Looking ahead, nearly all Committee participants view it as likely that some further rate increases will be appropriate this year to bring inflation down 2% over time,” Fed Chair Jerome Powell said.

Read more: CPI cools down in May, indicating Fed may hold rates steady

No surprises

Fed Chair Powell has maintained a long time tradition of doing what the market anticipates. He has said repeatedly that he doesn’t like to surprise the market.

“We don’t go out of our way to surprise markets or the public,” he said on Wednesday. “At the same time, our main focus has to be on getting the policy right.”

Market analysts aren’t satisfied with the current outlook. However, May’s inflation data presents a glimmer of hope. Most of the rise in prices were in core CPI, which reflected in high housing costs and used car prices. Those numbers are expected to fall later in the year.

“The battle against inflation is being won. This is now the time for the Fed to stop — not pause — interest rate hikes,” said Nigel Green of deVere Group, a group of financial advisors, in an email. “The time lag for monetary policies is notoriously long.”

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