From JPM.
At the conclusion of next week’s FOMC meeting we expect that the Committee will raise the target range for the fed funds rate by 25bp to 5.0%-5.25%. There will be no new dots and instead the Committee will provide guidance through the post-meeting statement. There we expect the language will change from discussing“some additional policy firming” to referencing“any additional policy firming.” In so doing, we believe the Committee will try to convey that while a June rate hike isn’t the incumbent scenario, the next move is more likely up than down. (We still think next week’s hike is the last in this cycle but see about a one-third chance of another 25bp increase in June). Balance sheet reduction is likely to continue unaltered. While there may be a discussion at the meeting about the future of the overnight reverse repo facility, we don’t expect any changes to that program next week. Finally, in the press conference we expect Powell will communicate that a pause doesn’t mean that the Fed thinks the inflation fight is complete, but rather that the lagged effect from past policy tightening is expected to weigh on future activity and price developments. He will likely also have to spend a fair bit of time explaining the Fed’s supervisory actions in the run-up to SVB’s demise, particularly since there was no press conference associated with the Fed’s internal review which was released today. A simple reason for expecting a 25bp hike next week is that the market is expecting 25bp and Fed officials and their contacts in the press corps have done nothing to correct that expectation. Another reason is that the dots released at the most recent meeting in March indicate a large majority of the Committee is expecting one more hike this year. While the dots didn’t explicitly point to May for that hike, the Fed’s never been good at signaling a skip-and-a-hike, so inferring May from the dots isn’t a stretch. Since the dots were released, the economic data haven’t delivered big surprises and we think it’s reasonable to believe that this guidance is still relevant. Any banking system developments over the weekend could restart the debate about separating monetary policy from financial stability policy. We know how that debate was resolved at the March meeting—with a hike. We don’t anticipate any dissents next week.
More interesting is the signaling for June and beyond. Our expectation is that the Committee will effectively signal a pause, but with a bias to tighten. Returning to the recent dots, while 10 participants were looking for a terminal funds rate of 5-1/8%, a sizable minority (seven participants) looked for a higher peak. Another reason to think there will be a bias to tighten further is that signaling a pause with no bias could risk sending the wrong message about the Fed’s inflation resolve. The Committee found itself in a qualitatively similar situation when they paused after hiking in June 2006. At that meeting, the statement’s guidance read “the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook…”We look for similar language in next week’s statement.
The statement’s description of economic conditions—modest spending and production growth, low unemployment, elevated inflation—is still apt and should only see minor edits. The March statement included a paragraph on banking system developments. Now that the crisis seems to have stabilized somewhat, that paragraph could get whittled down a little.
We don’t expect any tweaks to the Fed’s balance sheet reduction (QT) policy. The NY Fed’sstatement this week regarding the policy on counterparties for reverse repo operations mayindicate some unease on the Committee about the persistently large size of the overnightreverse repo facility. We expect this will become a more interesting discussion over the courseof the summer, but we don’t expect any changes to this facility next week.
