MNI: Higher Dots Seen Coming Alongside Fed Pause- Ex Officials

The Federal Reserve will likely boost "dot plot" estimates for policy interest rates at year-end, former officials and staffers told MNI, even with members widely expected to leave borrowing costs unchanged Wednesday.

"Skipping a rate hike" in June, as Fed vice chair nominee Philip Jefferson put it just before the FOMC headed into communications blackout, gives more time to judge effects of 10 consecutive hikes totaling 500 bps over the past year and the aftershocks of bank failures on credit availability. Continued strong readings on inflation and the labor market are likely to convince a number of officials that more tightening is eventually needed to slow the economy.

"A cold-nosed evaluation is we’re in a 4.5% inflation world. That is unacceptable," former Atlanta Fed President Dennis Lockhart said in an interview. "The committee is going to have to go further in all likelihood to get the desired disinflation."

All 18 members of the FOMC write their projections individually and the dot plot is not a coordinated communications device of the committee, the ex-Fed officials said. Nor is any effort made to adjust the dots to the decision of the committee.

PLENTY OF DISPERSION

“I think it would drift up but with a lot of dispersion,” former Fed Board of Governors economist Joseph Gagnon said. “In March there was a huge majority all lined up for the peak being where they are now, but almost all the people that didn’t agree with that were on the high side. So it wouldn’t take much, only two people I think, to raise the median” from 5.1%.

It's clear the hawks on the committee have become more hawkish since the May meeting. What's uncertain is how much the data have changed the minds of more dovish members. They often point to long and unpredictable lags in monetary policy and lending surveys and weaker PMIs that foresee weaker business conditions.

"Empirical models would tend to say the impact in the second year after a rate hike is bigger than in the first," possibly as much as double the impact in the second year, said former Fed Board economist Jonathan Pingle, now at UBS. But more fixed rate mortgages and less use of commercial paper, among other shifts in the economy, may have altered its sensitivity to interest rate changes.

"I feel a lot of conviction that there is still more weight to come on the economy from the monetary policy tightening already put in place," Pingle added. He still expects the median FOMC member to revise higher rates for 2023 and 2024 and for the Fed to hike another quarter point in July.

ALL OVER THE BOARD

To preserve optionality in future meetings Chair Jerome Powell will likely avoid committing to a July hike or an every-other-meeting pace for rate increases, former officials said, though that comes with its own challenges.

A June pause "might prematurely end the hiking cycle, leading us to miss the 2% target" when at least 50 bps of tightening is warranted, ex-NY Fed executive Rick Roberts said.

"I worry that the Fed will find it difficult to restart its tightening engine, particularly in light of recent official comments about potential new inflation ranges," he added. "The quality of Fed communications has been all over the board."