MNI: Fed June Dots To Show Further Hawkish Shift -Ex-Officials

Federal Reserve officials are likely to pencil in more aggressive rate hikes in their June forecasts because high inflation is proving even more persistent and widespread than policymakers believed, former Fed policymakers and staff economists told MNI.

Those shifts since the last official set of economic projections in March will likely be accompanied by a mix of higher inflation and lower growth estimates to balance out the policy message.

“You’ve got a number of people who are definitely arguing we should be at least at 3% by the end of the year, so I think you’re going to see a significant jump up,” from a median of 1.9% by year-end 2022 in the March dot plot, said Randall Kroszner, former Fed governor, in an interview.

Fed officials have said they would like to get the fed funds rate to more neutral levels expeditiously. “If you look at 2.5% to 3%, that’s where pretty much all members of the FOMC think neutral or slightly above neutral. Getting to roughly neutral relatively quickly without causing too much tumult is their goal," Kroszner said.

INFLATION STAYS HIGH

Joseph Gagnon, a former Fed board economist now at the Peterson Institute for International Economics, said the Fed will likely acknowledge inflation is more persistent and broad-based than believed even just three months ago, when policymakers forecasted year-end PCE inflation of 4.3% for 2022 and 2.7% for 2023.

“They will have to raise the inflation projection,” he said. “They will probably will raise the dots at least half a point and possibly more. I doubt they will forecast a recession, and yet they may not want to show inflation overshooting much in 2024.”

PCE inflation registered 6.3% in the year to April, a modest downtick from a March reading of 6.6% but oil prices have since picked up again as the war in Ukraine rages on and Chinese cities locked down for weeks to stop the spread of Covid-19, straining supply chains.

PEAK IN 2023

Officials have signaled 50-bp rate hikes in June and July, taking the fed funds rate to a 1.75%-2% range. A step back to quarter-point increases in each of the three remaining meetings of the year would take the rate to 2.5%-2.75% by December, but policymakers have said they need to see a consistent string of inflation declines before they are convinced a deceleration in the pace of tightening might be in order.

Ellen Meade, a former senior adviser at the Fed board, thinks the fed funds rate will peak around 3.25%-3.5% in this cycle. “That could mean ending the year around 2.50%-3% and that would mean switching over to 25s either in September or November,” she said.

U.S. elections a week after the November FOMC meeting make it awkward for the Fed to downshift to zero in September, Meade added. "What's much more likely is that in September they do 50 or 25 and they put in place forward guidance that takes you to the end of the year.”

NO RECESSION TALK

The Fed will likely move cautiously after rates hit 2.5% because of the uncertainty associated with determining just when monetary policy has become restrictive, MNI reported last week. (See: MNI: Wary Fed To Test Neutral Rate From Below–Ex-Staffers).

Next week, the FOMC will likely acknowledge the growth outlook is softening even as it shies away from even hinting at the prospect of recession.

"They should show real GDP falling below its longer-run trend, in order to be realistic,” said Selva Demiralp, also an ex-Fed board economist. “They started an aggressive tightening cycle. It is hard to imagine that this will not have a toll on GDP.”

In March, the Fed saw fourth quarter economic growth averaging 2.8% this year, 2.2% next year, and 2% in 2024 as the fed funds rate stays at a peak of 2.8% through 2024.