Federal Reserve: Economists mixed on whether Fed pause is a 'bluff' or a 'skip'

The Federal Reserve maintained its benchmark interest rate on Wednesday, holding rates in a range of 5%-5.25%.

With the move largely already priced into markets, Wall Street's focus centered on what Fed Chair Jay Powell said surrounding the Fed's next moves after changes to the Fed's "dot plot," which maps out policymakers' expectations for where interest rates could be headed in the future, suggested two more rate hikes could be coming this year.

"Inflation pressures continue to run high," Powell said at a Wednesday press conference.

Powell added the Fed "has a long way to go" bringing inflation down to its target.

Stocks were wobbly on the news, initially dropping on rises in projections to the terminal interest rate in 2023, before recovering during the press conference.

And Wall Street economists, for their part, were mixed on what the Fed's moves really mean for its future, with some calling the pause a "skip," while others called its outline for additional hikes a "bluff."

Michael Gapen, US economist, Bank of America

"A longer period of labor market resilience and sticky inflation should mean more Fed hikes. We expect the Fed to deliver another 25bp hike in July. Moreover, our revised outlook suggests that by the end of the summer, job growth will still be running well above the 'breakeven' pace of long-run labor force growth and inflation will still be well above target. Therefore, we look for an additional 25bp hike in September for a terminal rate of 5.5-5.75%, though the Fed may decide that the last hike should come in November."

Ryan Sweet, chief US economist, Oxford Economics

"The Federal Open Market Committee skipped hiking the target range for the fed funds rates but signaled that additional rate hikes are coming. Odds are that this is a bluff as inflation is going to continue to weaken in the second half of this year and into next. If it isn’t a bluff, and the Fed continues to hike, that would increase the odds that the central bank pushes the economy into a recession."

Krishna Guha and Marco Casiraghi, Evercore ISI:

"The dot shift looks to have been motivated by a big increase in the end year core PCE inflation forecast to 3.9 per cent — reflecting in part the PCE / CPI divergence we have written about in recent days — with policymakers adding in sufficient further tightening to bend core PCE back to 2.6 per cent by end 2024 as in the prior projection. This is now the focal point of policy."

Christopher Rupkey, FWDBONDS LLC:

"The long and winding road on interest rates just got a little longer as the Fed upped its terminal rate this cycle another 50 bps higher to 5.75%. Those betting they were done just got washed overboard and the markets are tumbling. The market was disappointed today as belief that the Fed was nearly done had spread in recent days. But history suggests higher rates might still be needed..."

Thomas Simmons, US economist, Jefferies:

"The SEP reflects a bigger change in the dot plot than we had anticipated, but the hawkish shift helps to reinforce the Fed's message that this 'skip' in June should not immediately be interpreted as the end of the Fed rate hike cycle. ... Our base case right now remains that the Fed is not going to hike rates further, but future rate hikes will depend on the tone of the incoming economic data."

Ian Shepherdson, chief economist, Pantheon Macroeconomics:

"For now, though, this is a more hawkish hawkish pause than we expected, and it strikes us as, well, pointless. Only one round of inflation and labor market data will be released between now and the July meeting, and the unreliability of the monthly numbers means that policy decisions, in our view, should not be determined by such short runs. It would have been better to hike today and then signal a revisit in September."

Paul Ashworth, chief North America economist, Capital Economics:

"All the action was in the new Summary of Economic Projections. ... We agree that the Fed will push ahead with another 25bp hike at the next FOMC meeting in late July but, although officials are now minded to keep going after that, we think that weaker activity and employment, together with more encouraging signs that core inflation is moderating, will ultimately persuade the Fed that is doesn't need a final hike in September."

RJ Gallo, senior portfolio manager, Federated Hermes:

"The Fed, in this message, is suggesting they need more time to see the implications of those banking sector stresses. Nevertheless, they took the opportunity to signal in the dots that they'll tighten more."

"I would suggest the recession we're going to see may actually resemble what we saw in 2000 or 2001… There were many negative financial market implications… but consumer spending, roughly 70% of GDP, never went negative. It’s quite possible we see that same dynamic."

Jay Bryson, economist, Wells Fargo:

"We expect that the continued resilience of the economy and the elevated rate of inflation will lead the Committee to hike by another 25 bps at that meeting. Indeed, Chair Powell stated in his post-meeting press conference that the July FOMC meeting will be a 'live meeting.' We then look for the Committee to remain on hold for the remainder of the year. However, given today's dot plot, we readily acknowledge that the risks to our fed funds forecast are skewed to the upside. We think it will take a modest recession early next year, which will help to bring inflation lower, to induce the FOMC to ease policy.”

Julia Coronado, president and founder, Macro Policy Perspectives:

"Clearly the banking crisis is at the heart of their decision to skip. Had we not had the banking crisis and we had had the same flow of data, they probably would have gone. The fact that there is a lot of uncertainty around that, and then there was the debt ceiling, and now there's the restoration of treasury funding after the debt ceiling. There's just a lot of things that led them to decide to just slow things down a bit."

Jeffrey Roach, chief economist, LPL Financial:

"Periods of economic regime shifts are difficult for policy makers to manage. This current environment could be eerily similar to early 2007 when the Fed held a tightening bias on rates as they believed the housing market was stabilizing, the economy would continue to expand, and inflation risks remained. Clearly, those expectations were not met since we know what happened in later quarters. Investors should anticipate some volatility during these months where the economic outlook remains cloudy."

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