MNI FED WATCH: July Hike On Table As Tightening Pace Slows

The Federal Reserve laid the groundwork for another quarter-point increase in its benchmark interest rate as soon as its July meeting, after officials agreed more tightening is needed to slow a strong and resilient U.S. economy -- despite Wednesday's decision to keep borrowing costs on hold.

"I would say about July, two things. One, a decision hasn't been made. Two, I do expect that it will be a live meeting," Powell told reporters after the FOMC decided to make no move while they see how the effects of past rate hikes are playing out.

"Nearly all committee participants expect that it will be appropriate to raise interest rates somewhat further by the end of the year. But at this meeting, considering how far and how fast we have moved, we judged it prudent to hold the target range steady to allow the committee to assess additional information and its implications for monetary policy," he said.

An updated set of economic projections showed 12 of 18 FOMC officials saw at least two more quarter-point hikes this year, which is two more than they expected in March. The median rate at end-2023 is 5.6% before falling to 4.6% next year. (See MNI POLICY: Fed Most Divided Since Start Of Hikes, More Loom)

SLOWING DOWN

"As we get closer to the destination, and according to the (Summary of Economic Projections) we're not so far away from it, it's reasonable, it's common sense to go a little slower, just as it was reasonable to go from 75 basis points to 50 to 25 at every meeting," Powell said.

Powell emphasized the benefits to moderating the pace of tightening: more data to make an informed decision, more time for the economy to adapt to higher rates for the Fed to understand the full extent of the consequences of the banking turmoil.

"The pace of the increases and the ultimate level of increases are separate variables, given how far we have come," he said. "It may make sense for rates to move higher, but at a more moderate pace."

Stocks were treading water after Powell's remarks while rates futures pricing on a July hike was flat at just above a 50-50 chance. Markets see a terminal fed funds rate of 5.29% by September and 8 bps of cuts by year-end.

4.5% INFLATION

The risks to inflation remain to the upside, with strong job creation fueling higher wages that in turn supporting spending and hiring, Powell said. The median FOMC projection for the unemployment rate in the fourth quarter was revised down to 4.1% Wednesday from 4.5% three months ago. Officials expect PCE inflation to fall to 3.2% by year-end; it was 4.4% in April and 4.7% excluding food and energy prices.

"If you look at core PCE inflation overall, over the last six months, you're not seeing a lot of progress. It's running at a level over 4.5%, far above our target and not really moving down. We want to see it moving down decisively," Powell said.

In the core non-housing services categories of inflation, many of them spanning labor-intensive sectors, "we see only the earliest signs of disinflation," he said. Continued loosening in labor market conditions are key to getting inflation down in those categories, and while those conditions are coming into place, "the process of that working on inflation is going to take some time," Powell said.

Tighter credit conditions, in part due to aftershocks of the March regional bank failures, will play a part to slow the economy, though it's still too early to assess the extent of those effects, Powell said.