When it comes to reading the Federal Reserve tea leaves, UBS analysts don’t foresee another rate hike coming out of the June FOMC meeting June 13-14.
Instead, the firm expects the agency’s so-called dots (referring to interest rate target ranges) to be revised up for 2023 and 2024.
“We do not expect Chair Powell to pre-commit to raising rates in July, but we expect a majority of FOMC participants will assume that more monetary policy tightening is needed in order to restore price stability,” the analysts wrote in a note published June 2.
“The median dot has displayed a relatively stable spread to the inflation projections in the last three SEPs [summaries of economic projections]. Since we expect the median core PCE [personal consumption expenditure] inflation projections to revise up in the June SEP, maintaining that constant spread should move up the median 2023 and 2024 dots, too.”
Specifically, UBS expects the FOMC’s meeting statement to be little changed from May on substance, save for the absence of a rate hike.
“In the first paragraph, economic activity likely continued to expand at a modest pace,” the analysts wrote, predicting the FOMC’s statement. “Job gains remained ‘robust’ and ‘inflation remained elevated.’
“Then in the policy paragraph, ‘In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 5 to 5-1/%.’"
Ultimately, UBS believes the FOMC participants' median inflation projections will revise up, thus carrying the median dot with it.
Just how many dots should investors be watching for?
“We expect seven dots to signal that the tightening cycle has indeed ended but expect 11 dots to think more monetary policy tightening would be appropriate,” the analysts wrote.
Contact Andrew Kessel at andrew.kessel@proactiveinvestors.com
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