MNI STATE OF PLAY: Fed Lays Path To Restrictive Stance Near 4%

Federal Reserve Chair Jerome Powell Wednesday said another 0.75-percentage-point rate increase is possible in July as the central bank refreshed its projections showing its path to a restrictive stance that could reach nearly 4% in 2023.

“I do not expect moves of this size to be common," Powell said in a press conference after delivering the first supersized 75 basis point increase since 1994, bringing the fed funds rate range to 1.50%-1.75%. "Either a 50 basis point or a 75 basis point increase seems likely” at the next meeting, he said about July, adding that he wants to be in restrictive territory this year.

Fed policymakers also saw interest rates rising substantially more than they had predicted in March, with the median forecast for the fed funds rate ending the year at 3.4% and 2023 at 3.8%, before moving down to a still-elevated 3.4% in 2024. The Fed kept its 2.5% estimate for a longer-run neutral rate.

Futures markets were pricing in a 65% chance of another 75 bp move in July following the meeting and Powell's briefing.

Powell showed some concern for slowing growth in the economy but said the U.S. is still seeing healthy levels of activity. "We are not seeing a broad slowdown," he said.

"We're not trying to induce a recession now, let's be clear about that," Chair Powell said, but added that the path for a soft landing involves moving demand down and is "not getting easier."

"It's getting more challenging due to these external forces, to move demand down. There's surplus demand in the labor market," Powell said.

"What we need to see is a series of declining monthly readings in inflation. Right now our policy rate is well below neutral," he said. "Ultimately we won't declare victory until we see compelling evidence inflation is coming down. We'll be careful about declaring victory."

BIGGER INCREASES?

Powell pointed to the larger than expected 8.6% May CPI release for the abrupt change in Fed guidance for a larger 75bp Fed move this week, and also cited a move up in inflation expectations from the University of Michigan and the Fed board's internal Index of Common Inflation Expectations.

"We're looking for progress on inflation, it can't go down until it flattens out. If we don't see progress for a long period that could cause us to react."

Asked whether another tick up in inflation expectations could push the Fed to consider a larger 100 basis point increase, Powell did not dismiss it and said: "We're going to just say we're going to react to the incoming data."

Showing more concern for inflation expectations, Powell stressed the central bank is not seeing signs of a wage price spiral. (See: MNI: Inflation Expectations Already Unmoored -Ex-Fed Officials)

The Fed's new projections also showed a half percentage point increase in the unemployment rate from today through 2024. "We don't seek to put people out of work but you can't have the labor market we want without price stability and we have to establish price stability," he said.

Chair Powell also expressed confidence in the central bank's plans to begin rolling off assets from its balance sheet despite recent market volatility. "We've indicated to the markets what we're going to do there, it seems to be accepted by markets," he said in response to a question by MNI.

The Fed boosted its projections of PCE inflation this year to 5.2% from 4.3%, and downgraded its forecasts for economic growth in 2022 to 1.7% from 2.8% in the March forecast.