Fed Pauses Interest Rates: A Short-Lived Break — Or The End For The Hiking Frenzy? 5 Economists React

The Federal Reserve opted to hold interest rates steady at its June FOMC meeting, as widely expected by the market. The Fed also signaled in its revised economic forecasts that additional rate hikes may still be on the horizon for this year.

The move initially caught the markets by surprise, with the SPDR S&P 500 ETF Trust SPY moving 0.6% lower, but Powell’s press conference brought bulls back to the stage. The Fed chair stressed the importance of data-driven decisions at each meeting and warned the anticipated rate projection was open to change.

Investors are left pondering whether the June meeting marked the definitive conclusion of the Federal Reserve’s hiking cycle, which saw a cumulative increase of 500 basis points since March 2022, or if it was merely a temporary respite, with the Fed prepared to resume tightening later this year if economic indicators continue leaning that way.

Here are five answers given by financial experts and Fed watchers.

Two More Hikes, Bank of America Says

Bank of America’s U.S. Chief Economist Michael Gapen expects two more 25-basis-point rate hikes in July and September or November.

“A longer period of labor market resilience and sticky inflation should mean more Fed hikes,” the expert wrote in a note on Wednesday.

With rate hikes possibly continuing throughout the summer, Bank of America believed the Fed will begin lowering rates in May 2024 rather than March 2024, as previously predicted, with a simultaneous end of quantitative tightening.  

Fed’s Hawkishness Will Raise Recession Risks

“Today's interest rate decision may provide the struggling economy with a much-needed breather,” according to Oliver Rust, head of product at independent inflation data aggregator Truflation.

However, the analyst noted several signs are pointing to a downturn in this quarter and the U.S. economy may struggle to return to positive growth in the following quarter. The Fed’s hawkish stance raised concerns about a potential recession, albeit a technical one.

A 2007 Remake Leading To Increased Market Volatility

According to Jeffrey Roach, Chief Economist at LPL Financial (Charlotte, NC), managing periods of economic regime shifts is difficult for policymakers.

Roach underlined the failure of such expectations by drawing comparisons to early 2007, when the Fed maintained a tightening stance on rates based on expectations of housing market stabilization, continuing economic expansion and manageable inflation threats.

Investors should brace themselves for probable turbulence in the coming months as the current economic picture remains uncertain.

Further Hikes Ahead And No Rate Cuts In The Horizon

Joe Brusuelas, chief economist at RSM US LLP, analyzed the recent FOMC meeting and highlighted the underlying hawkish tones despite the decision to keep rates unchanged.

Brusuelas anticipated a cautious approach from policymakers as they closely monitor labor market developments and inflation trends.

He anticipates a rate hike in July, and dismisses the likelihood of rate cuts in the near future. By year-end, the policy rate is projected to peak at 5.75%, according to the expert.

Inflation Becoming Entrenched Without Further Hikes

Chris Zaccarelli, chief investment officer of Independent Advisor Alliance, continued to believe consumer spending is much more resilient than anyone would have believed, and inflation is here to stay with risks becoming entrenched, unless the Fed raises interest rates significantly more than the market currently expects.

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Chart: U.S. Real Interest Rates Jumps To October 2009 Highs

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