But Dot Plot Shows Rate Hike in 2023

• The FOMC made no change to monetary policy, keeping the fed funds rate near zero and maintaining its asset purchases of $120 billion per month.
• The conditions for raising the fed funds rate and reducing asset purchases were also unchanged. There was no mention of when the Fed might reduce its asset purchases.
• According to the dot plot FOMC participants expect the next increase in the fed funds to come in 2023; the previous dot plot indicated no increase until at least 2024.
• Financial market reaction was mixed, with stocks down and long-term yields up.

The Federal Open Market Committee kept monetary policy unchanged in its June 16 statement, keeping the fed funds rate in its current near-zero range and maintaining monthly purchases of $80 billion per month of long-term Treasurys and $40 billion per month of mortgage-backed securities.

In addition, conditions for raising the fed funds rate were unchanged from the previous statement on March 17: the FOMC said that it does not expect to increase the fed funds rate until “until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time.” The FOMC expects to maintain its securities purchases “until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.” The language on expectations for the fed funds rate and asset purchases has not changed since December 2020.

For the first time in more than one year, the statement dropped language on the “tremendous human and economic hardship” tied to the pandemic. The June 16 statement discussed “progress on vaccinations” and said that “indicators of economic activity and employment have strengthened.” In particular, the statement said that “the sectors most adversely affected by the pandemic remain weak but have shown improvement.”

The discussion on inflation was brief, noting that “inflation has risen, largely reflecting transitory factors.” The statement reiterated the FOMC’s stance that it wants inflation to average 2% “over the longer run.” Thus, with inflation having been below 2% “for some time,” the FOMC is aiming “to achieve inflation moderately above 2% for some time so that inflation averages 2% over time.”

The FOMC raised the interest rate on reserves (both required and excess) by 5 basis points to 15 basis points. It also increased the rate on overnight reserve repos to 5 basis points from zero. These changes are intended to ensure that the fed funds rate trades within its range (0.00% to 0.25%).

The statement was unanimous.

The Summary of Economic Projections, or “dot plot,” accompanying the release indicated one notable change to the medium-term path of monetary policy. More than one-half of participants expect to increase the fed funds rate in 2023 by 50 basis points; in the previous dot plot, from March, the median fed funds rate remained in its current 0.00% to 0.25% range until at least 2024. In the June 16 dot plot, seven of the 18 participants expected an increase in the fed funds rate in 2022 of at least 25 basis points.

The economic outlook in the most recent dot plot was little changed compared to March. The biggest difference was for inflation: the median PCE inflation rate for 2021 was 3.4% in June, compared to 2.4% in March, with the median core (excluding food and energy) PCE inflation rate for 2021 at 3.0% in June, compared to 2.2% in March. But most FOMC participants expect inflation to slow to slightly above 2% in 2022 and 2023. The median forecast for GDP growth in 2021 was revised slightly higher, to 7.0%, from a median of 6.5% in March.

There was no mention of reducing asset purchases (“tapering”) in the June 16 policy statement. The FOMC is likely to reduce these asset purchases starting in early 2022 and will need to prepare financial markets. FOMC participants are likely to begin discussing tapering in their speeches and interviews soon. But in his press conference, Fed Chair Powell said that achieving the FOMC’s goals for tapering (“substantial progress” toward full employment and inflation at 2% and on track to move above 2%) is “still a ways off,” although he did note “progress toward our goals.”

PNC expects the Fed to signal its plans for tapering in a few months, perhaps at Chair Powell’s speech at the Jackson Hole monetary policy conference in late August. The Fed will gradually reduce its asset purchases starting in early 2022 and end those purchases by the end of 2022. PNC expects the next increase in the fed funds rate to come in mid-2023 when the Fed achieves full employment and inflation consistently above 2%.

The S&P 500 fell around 0.5% after the release of the FOMC statement, while the yield on the 10-year Treasury note rose by 8 basis points to 1.56%. The U.S. dollar strengthened against a basket of currencies, while the price of a barrel of oil was little changed at around $72 for West Texas Intermediate crude.

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