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June CPI, the Fed, & Interest Rates

June CPI, the Fed, & Interest Rates

June 19, 2023

Jerome Powell skipped an interest rate hike at the Fed’s June meeting, but the market isn’t buying what the Fed Chair is selling about what’s next with short-term rates.

Powell signaled that two more rate increases may still be in store for later this year and indicated that “we’re talking about a couple of years out” before the Fed might cut rates.1

But that’s not what market participants anticipate. As you can see in the accompanying chart, most see one more rate increase later this year, and the consensus sees rates trending lower as early as December 2023.2

To Powell’s credit, he said the Fed hasn’t yet decided on July’s policy, which means all eyes will closely watch economic reports such as the Consumer Price Index (CPI). As you can see in the other chart, next month the whopping 1.2% increase from June 2022 will be dropped from the 12-month rate.3

The Cleveland Fed, which published the widely followed Inflation Nowcasting tool, is forecasting a 3.22% annual rate for CPI in June 2023. That’s getting close to the Fed’s long-term inflation target of 2.0%.

But I can understand why Fed Chair Powell is conservative with his interest rate outlook. He was the same person who tried to convince the markets that “inflation was transitory” in early 2021. He doesn’t want his legacy as Fed Chair to be that he underestimated inflation – twice!

Navigating monetary policy in recent years has been extremely challenging. But I expect the Fed will be happy to report upbeat news in the months ahead if warranted.

1., June 14, 2023. “Fed Recap; Breaking down the market’s reaction to the Fed’s pause and all of Powell’s key comments."
2. Forecasts are based on assumptions and are subject to revisions over time. Financial, economic, political, and regulatory issues may cause the actual results to differ from the expectations expressed in the forecast.
3., June 13, 2023.