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The Fed Finally Hits Pause, Though More Hikes Expected

After 10 consecutive rate hikes, the central bank decided to leave rates unchanged in June; ‘We judged it prudent to hold the target range steady,’ Fed chair says.

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At their June meeting, Federal Open Market Committee (FOMC) members unanimously agreed to hold the fed funds rate unchanged at 5%-5.25%, a move widely expected by the markets. In a statement, Federal Reserve said that the pause “allows the committee to assess additional information and its implications for monetary policy.”

Federal Reserve Chair Jerome Powell added in his post-meeting news conference: “We’ve covered a lot of ground, and the full effects of our tightening have yet to be felt. … Considering how far and how fast we’ve moved, we judged it prudent to hold the target range steady.”

But the FOMC stated that two more rate hikes are expected this year (median projections are for a fed funds rate of 5.6% by the end of 2023), and Chair Powell indicated that rate cuts will likely not happen for several more years.

“It will be appropriate to cut rates at such time as inflation is coming down really significantly. And again, we’re talking about a couple of years out,” Powell said. “As anyone can see, not a single person on the committee wrote down a rate cut this year, nor do I think it is at all likely to be appropriate.”

The FOMC statement reiterated that any potential actions by the committee will consider “the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”

At the meeting, the Fed also updated its 2023 economic projections from March, which showed increases in GDP from 0.4% to 1% and the core Personal Consumption Expenditures Price Index (PCE) from 3.6% to 3.9% but predicted a drop in unemployment from 4.5% to 4.1%.

Below are the language changes made in the Fed’s statement from May:

Source: FOMC as of 6/14/23.

Here are the committee’s June projections for Gross Domestic Product (GDP), unemployment, inflation, and the federal funds rate for 2023 through 2025 and beyond:

Source: FOMC as of 6/14/23.

The committee’s “Dot Plot” showed nine of 18 committee members expecting the fed funds rate to finish 2023 at a range of 5.50%-5.75%, suggesting two more quarter-percent raises. The Fed also anticipates several interest-rate cuts in 2024 and 2025, bringing the fed funds rate down to 4.6% and 3.4%, respectively.  

Source: FOMC as of 6/14/23. FOMC participants' assessments of appropriate monetary policy: Midpoint of target range or target level for the federal funds rate.

After the Fed announcement, the 10-year Treasury ended the day lower by one basis point to 3.83%. The 2-year Treasury finished seven basis points higher to 4.74%, and the 30-year Treasury ended the day four basis points lower to 3.9%. Treasury yields across the curve increased in the 25 minutes following the Fed’s statement as the curve flattened.

Source: FOMC as of 6/14/23.
10-Year Treasury Yield over the Past 12 Months
Source: FRED as of 6/14/23. U.S. Department of the Treasury as of 6/14/23.

Equity markets had mixed results on the final day of the FOMC meeting, with the Dow Jones Industrial Average finishing in negative territory at -0.68% and the S&P 500 Index closing up at 3.58%.

In conclusion

The FOMC met market expectations by finally pausing its aggressive interest-rate hikes but did leave the door open for two more hikes in 2023. Investors currently expect a 64.5% chance of a quarter-point rate hike at the FOMC’s July 25-26 meeting, according to the CME FedWatch Tool.

The Fed continued its measured tone, underscoring that it will remain “highly attentive to inflation risks” as it weighs the need for additional hikes. While the decision to pause hikes was unanimous, it’s important to note that the Fed’s Dot Plot for 2024 and 2025 showed a wide variance among FOMC members about the size of future rate cuts.

The key to upcoming Fed decisions on interest-rate hikes rests largely with the direction and speed that inflation is heading. As for now, investors will now consider how long this pause may last.

Definitions:

One basis point is equal to 0.01%.

The Dow Jones Industrial Average Index (DJIA) tracks the share price of the top 30 large, publicly-owned U.S. companies which is often used as an indicator of the overall condition of the U.S. stock market.

Gross Domestic Product (GDP) is the total monetary or market value of all the finished goods and services produced within a country's borders in a specific time period.

Personal Consumption Expenditures (PCE) refers to a measure imputed household expenditures defined for a period of time.

The S&P 500 index is a market capitalization-weighted index of 500 widely held stocks often used as a proxy for the U.S. stock market.

Any performance data quoted represent past performance, which does not guarantee future results. Index performance is not indicative of any fund’s performance. Indexes are unmanaged and it is not possible to invest directly in an index. For current standardized performance of the funds, please visit www.AristotleFunds.com.

The views expressed are as of the publication date and are presented for informational purposes only. These views should not be considered as investment advice, an endorsement of any security, mutual fund, sector or index, or to predict performance of any investment or market. Any forward-looking statements are not guaranteed. All material is compiled from sources believed to be reliable, but accuracy cannot be guaranteed. The opinions expressed herein are subject to change without notice as market and other conditions warrant.

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Foreside Financial Services, LLC, distributor.

Bloomberg Finance L.P. is unaffiliated with Aristotle Capital, Aristotle Funds, their affiliates, their distributors, and representatives.

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