Fed pauses but dot plots show futher hikes, causing some confusion

The Federal Reserve (Fed) halted rate hikes yesterday, after 10 consecutive rate rises over 15 months. In effect, the Fed has chosen to evaluate the impact its rate rises are having. Nevertheless, it indicates that the central bank has made headway in addressing inflation.

The pause, perhaps, allows the Fed to pull back on its aggressive monetary tightening and help alleviate some of the strain being exerted on the economy. However, the dot plot shows 12 of 18 FOMC members expect at least two more rates increases this year. No member expects a cut, and the more hawkish members point to three more hikes to come.

The median forecast for year end is at 5.6%. This is higher than the 5.1% from the March forecasts and implies a 50bps increase from current levels.

However, this indicates a disconnect between the decision to pause and the hawkish estimates. If there is a need for more tightening, why pause at all? The Fed might be expressing more ambitious intentions than it anticipates fulfilling and that we are, in fact, close to the apex of the current hiking cycle. Otherwise, the Fed should have raised rates yesterday.

In the press conference, Fed Chair Powell said, that, "we want to see [inflation] moving down decisively. That's all."

Our studies indicated that in previous stagflationary periods, PPI tended to lead core CPI down. We now have an inflection point, with PPI crossing below core CPI. If core PCE, the Fed's preferred measure of inflation, responds to this, Chair Powell may get exactly what he wants. If so, the pause will carry greater weight than the dot plot forecasts.