The Federal Reserve maintained interest rates unchanged in June’s FOMC meeting. However, what came as a surprise to the market were the following three crucial signals delivered by the Federal Reserve.
FOMC June meeting message No.1：More than one hike is underway
Federal Reserve maintained interest rate within the current range of 5% to 5.25% in June rate meeting, as expected. The explanation provided was that the Federal Reserve needed time to assess the lagging impact of the previous ten consecutive rate hikes. While the market had widely anticipated another rate hike in July, it seems that the Federal Reserve has more in store.
Notably, in the post-meeting press conference, the Fed Chair indicated that more rate hikes might be necessary to bring inflation back to the 2% target range. Another clear evidence of this stance is the release of the Fed's interest rate projections for the next three years. The Fed increased its projected rate peak for 2023 from 5.1% (as forecasted in March) to 5.6%. This implies that if there is a 25 basis point hike in July to 5.25%-5.5%, the Federal Reserve may consider another rate increase in the fourth quarter.
FOMC June meeting message No.2：Inflation will persist for longer than expected
Despite the recently released CPI data suggesting a significant easing in inflation in May, reaching the lowest point in two years, it appears that the Federal Reserve remains cautious. The opening paragraph of their latest statement explicitly states that inflation remains elevated.
Furthermore, the Federal Reserve predicts that core inflation will be higher than previously expected. This is reflected in their economic projections, where they raised the terminal forecast for the Core Personal Consumption Expenditures (Core PCE) index in 2023 from 3.6% to 3.9%, and in 2025 from 2.1% to 2.2%.
The primary concern of the Federal Reserve regarding inflation's "stickiness" stems from the labor market. According to their forecasts, the US unemployment rate is expected to remain below 4.6% for the next three years, indicating a persistently low level.
FOMC June meeting message No.3: Economy is strong now but will slow from 2024
Regarding the economic outlook, the Federal Reserve displayed strong confidence in the June meeting. Despite the recent crisis-like events, from US regional banking crisis to US government's debt ceiling turmoil, the Federal Reserve seemly believes these events have had no significant impact on the economic prospects. On the contrary, the central bank predicts better-than-expected performance for the US economy in 2023, leading to a substantial upward revision of the GDP growth target from the initial median of 0.4% to 1%.
As for when the economy might experience a slowdown, the Federal Reserve indicates that it is likely to occur in 2024. Consequently, they have revised down the economic forecast for 2024 from 1.2% to 1.1%, and they anticipate the effects to persist into 2025.
USD Technical Analysis
From a technical perspective, the USD dollar index has shown mixed signals. While the shorter-term hourly chart indicates a temporary uptick following the Fed's hawkish stance, the overall daily chart still reflects a downward trend. Currently, the USD is finding support above the 50-day moving average, providing short-term stability. However, the ability to hold above the 100-day moving average remains uncertain.
In addition to maintaining above the 100-day moving average, the USD would need to break through the key level of 102.95 and effectively breach the downward trendline to have a chance of reversing the trend. If successful, the USD could potentially target the 103 level.