June 14, 2023 Fed interest rate and stock market news

The Federal Reserve paused its rate hikes, but the breather “will likely be very short-lived,” said Greg McBride, chief financial analyst at Bankrate. He expects rate hikes to resume as soon as July.

“Further rate hikes seem very likely, if not a near certainty,” he said in a statement Wednesday afternoon.

“Of the 18 FOMC participants, only 2 see interest rates holding steady this year and no one expects a reduction in rates. The other 16 participants all forecast additional rate movement from the Fed, ranging from just one more rate hike to as many as four by year-end,” he said.

McBride said the robust job market and still-high core inflation mean the Fed is “nowhere close to cutting interest rates.”

Federal Reserve Board Chairman Jerome Powell speaks during a news conference following the Federal Open Market Committee meeting, at the Federal Reserve in Washington, DC, on June 14.

Federal Reserve board members believe that inflation may be a little more elevated later this year than previously thought, but they don’t see the labor market and overall economy taking as much of a hit in the process.

The Fed, in its latest Summary of Economic Projections, expect inflation (as measured by the core Personal Consumption Expenditures index) to register at 3.9% by the end of this year. That’s up from a median projection of 3.6% after the central bank’s March meeting.

The core PCE index – the Fed’s preferred inflation gauge – was up 4.7% for the 12 months ended in April, the Commerce Department reported late last month.

In Wednesday’s projections, Fed members forecast real GDP growth of 1% for the fourth quarter of 2023. That’s up from a median estimate of just 0.4% in March.

The unemployment rate expectations improved as well. Fed officials now anticipate that the jobless rate could tick up to 4.1% to close the year. Three months ago, they projected a 4.5% unemployment rate.

However, the longer-term outlook for economic activity, unemployment and inflation didn’t shift much from the median projections laid out previously. Core PCE is expected to ease to 2.6% in 2024, matching the March projections; however, the median expectations for core PCE in 2025 ticked up 0.1 percentage point to 2.2% – putting that another tick further from the Fed’s 2% target.

Fed officials still expect the unemployment rate to rise to 4.5% in 2024 and 2025 before settling in at 4% for the longer run.

While the Federal Reserve said Wednesday it would pause its rate-hiking campaign, it also signaled that additional rate hikes are likely this year.

The vote to skip a rate increase this meeting was unanimous.

The Fed’s post-meeting statement confirmed that officials deem the pause a prudent move, but most officials think additional hikes are necessary this year, according to the Fed’s latest Summary of Economic Projections.

“Holding the target range steady at this meeting allows the Committee to assess additional information and its implications for monetary policy,” the statement said.

Most officials estimate the federal funds rate will top out at a range of 5.63-5.87% in 2023, suggesting there will be at least one additional rate hike this year, but mostly likely more, depending on the size of each hike. 

Future policy moves depend on what economic indicators show in the coming weeks and months, including the resilient job market. Payroll growth remains solid, as do wage gains, which put some upward pressure on prices. Top economists argue the still-tight labor market will prove to be a stubborn source of inflation that would need to rebalance in order to help inflation successfully fall to the central bank’s 2% target. Most officials in the Federal Open Market Committee, which sets monetary policy, expect the unemployment rate to rise to a range of 4-4.1% this year.

Officials are also keeping a close watch on how credit conditions shape up, considering some lingering stress in the regional banking sector. Banks have been toughening their lending standards this year, and that is expected to continue. That would take some steam out of spending if US consumers have a harder time accessing credit to fund their lifestyles, especially since they have racked up debt in recent months. Americans will soon cut back on goods purchases as the shift toward services spending continues, economists say.

“Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring and inflation,” according to the statement. “The extent of these effects remains uncertain.”

A trader works at the New York Stock Exchange on June 14.

Stocks tumbled after the Federal Reserve paused interest rates on Wednesday but signaled that more rate hikes are on the horizon.

The Dow fell 414 points, or about 1.2%, after the Fed announced its latest rate decision and gave guidance into its continued trajectory. The S&P 500 slid 0.7% and the Nasdaq Composite slipped 0.8%.

Still, market pricing for a July hike remained largely unchanged.

The Federal Reserve paused interest rate hikes on Wednesday, but investors are already looking for clues about what comes next.

To do that they’ll pore over the Fed’s Summary of Economic Projections, released four times a year.

It includes what is colloquially known as the dot plot, which shows where each of the central bank’s 19 officials expect interest rates to go in the future.

Investors pay close attention to these forecasts for information about the path of rate hikes next year and beyond.

How it works: Each of the 19 Fed officials can place a dot for where they believe the midpoint of the interest rate’s appropriate range will be over the long run. Investors then focus on the median dot.

When there’s a shift in the plot, it tells investors that the Fed plans to either increase the pace of its interest rate hikes or slow them down. 

The plot often shows the difference between what investors think will happen and what the Fed thinks will happen. Market expectations for future hikes already differ from Fed median expectations, according to the CME FedWatch tool. So if the Fed were to project that rates go higher, or that there are fewer rate hikes ahead, that could send bond yields higher.

These projections also give insights into Fed officials’ projections for GDP growth, the unemployment rate and inflation, as well as interest rate forecasts.

The Marriner S. Eccles Federal Reserve Board Building seen on September 19, 2022 in Washington, DC. 

The Federal Reserve said Wednesday it would pause its historic rate-hiking campaign as it waits for the effects to trickle further through the economy.

Since March 2022, Fed officials have raised the central bank’s benchmark interest rate 10 times in a row — an attempt to cool the US economy and battle inflation that is still double the Fed’s target.

Federal Reserve Chairman Jerome Powell holding a news conference after the release of U.S. Fed policy decision on interest rates, in Washington, on May 3.

Federal Reserve Chair Jerome Powell has taken some heat over the central bank’s aggressive action to bring down inflation. Critics including Sen. Elizabeth Warren have accused Powell of wanting to throw millions of Americans out of work by implementing a series of harsh rate hikes that stifle economic growth.

But Powell has stuck to his guns, oft repeating a variation of this phrase: “We’re committed to getting inflation back down to 2%, because we think that a failure to restore price stability would mean far greater pain later on.”

In other words, entrenched inflation would be worse in the longer run than the damage of tackling rate hikes head on and potentially triggering a recession — including a “softening” in the labor market, aka job losses.

And while he has been candid about mischaracterizing burgeoning inflation as “transitory” in 2021, let’s review the Fed’s progress since then:

A year ago:

While there are still outstanding issues in the economy, including the shadow of a banking crisis and warnings of a commercial real estate bubble, economists (and CEOs) who previously warned of a major recession and job losses in the millions are being outflanked by new forecasts of a shallow recession or even a “no-recession recession.”

“We’re running out of time for a 2023 recession,” Justin Wolfers, an economics professor at the University of Michigan, told CNN’s Matt Egan. “People have been telling us we’re in a recession for the last two years. They’ve been wrong each and every day. Employment has grown gangbusters. The data is crystal clear on this. There is no recession.”

While that prognosis doesn’t entirely discount the fact that US consumers are feeling real financial pain following two years of high inflation, it does bring the economy closer to the “soft landing” that Powell predicted a year ago.

A trader works on the floor at the New York Stock Exchange on June 14.

The broad-based S&P 500 index gained Wednesday, as investors awaited the Federal Reserve’s latest interest rate hike decision.

The S&P 500 gained 0.1% and the Nasdaq Composite rose about 0.2%, just a half hour before the Fed’s announcement, due at 2 p.m. ET. The Dow fell about 0.5%, dragged down by losses in health insurance stocks.

Wall Street largely expects the Fed to hold rates steady, with the possibility of a hike later this summer. Fed Chair Jerome Powell’s post-meeting press conference, where he’s expected to give more insight into the Fed’s interest rate trajectory, is slated for 2:30 p.m. ET.

People walk past the New York Stock Exchange during afternoon trading on June 02 in New York City. 

The Dow fell 113 points, or 0.3%, Wednesday morning after UnitedHealth warned that higher medical costs are coming.

The industry bellwether said that seniors are catching up on procedures delayed during the height of the Covid pandemic, leading to an increase in demand during the second quarter and likely higher medical costs as a result.

Shares of UnitedHealth fell 6.9%. Other health insurance stocks also fell on the news: Humana shares fell 11.5%, Cigna declined 2.5% and CVS Health, which owns Aetna, slipped 4.9%.

The S&P 500 and Nasdaq Composite rose 0.1% and 0.06%, respectively.

An employee restocks meats at a grocery store on January 17 in North Miami, FL.

The May Producer Price Index is “further evidence that the inflationary spike of the past two years is receding,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance.

“Ultimately the Fed cares about consumer inflation — both CPI and PCE — but the PPI is a reading of the input costs and in theory should be a leading indicator of CPI. In practice, it is up to service providers and sellers of goods to either pass on those savings or hold their prices constant and save the difference for themselves and increase their margins.

The Fed is going to find it “increasingly difficult” to raise rates again this year, Zaccarelli said.

“As a result, we are stuck in no-man’s land where inflation is above target, monetary policy is tight and employers hoard labor. As long as this dynamic persists, we won’t have a recession, but ultimately something has to give.”