After Another Rate Hike, Fed Softens Language About Future Raises

As expected, the Federal Open Market Committee (FOMC) raised the federal funds target 0.25 percentage points to a range of 5.00% to 5.25% on May 3rd. The Fed’s policy statement softened forward guidance further, omitting the phrase “some additional policy firming may be appropriate” from the March statement (emphasis ours). Instead, the May statement said, “in determining the extent to which additional policy firming may be appropriate to return inflation to 2 percent over time, the Committee will take into account” and listed some factors that affect the future path of inflation, such as cumulative and lagged effects of monetary policy and financial developments. This could indicate disagreement among FOMC members about whether the Fed should stop raising interest rates. 

The FOMC judged economic activity expanded at a “modest pace” in the first quarter. They deemed job gains in recent months to be “robust” and inflation to be “elevated.” 

In response to a journalist’s question about rate cuts at the post-decision policy press conference, Chair Powell noted the FOMC does not expect inflation to decline swiftly and so, “it wouldn’t be appropriate” to cut rates this year. Overall, the Fed’s interest rate decision and Powell’s comments at the press conference signal a hawkish monetary policy pause, meaning the FOMC wants the public to believe its next move is more likely another hike than a cut. Financial markets, however, disagree. They price in only a short pause, with rates lower by September. Markets are positioned for the Fed to cut the fed funds rate by a cumulative three quarters of a percentage point by year end.

The American economy added 253,000 jobs in April, well exceeding the 175,000 consensus expectation. However, the prior two months’ job gains were revised down a big 149,000. Year-to-date, 285,000 jobs have been added, on average, notably down from the 484,000 average in the comparable period last year. The unemployment rate edged down a tenth of a percent to revisit January’s half-century low of 3.4%. The labor force participation rate and average workweek held steady at 62.6% and 34.4 hours, respectively. Wages rose more than expected, up 0.5% on the month, pushing up the annual increase to 4.4% from 4.2% in March. The labor market remains exceptionally tight, which will keep wage inflation elevated near term. However, job postings are declining sharply and layoffs are rising, portending slower hiring and wage growth in the second half of 2023.

Bill Adams is a senior vice president and chief economist at Comerica. Waran Bhahirethan is a vice president and senior economist at Comerica.