The US Federal Reserve (Fed) is expected to keep interest rates unchanged on Wednesday, but will signal that it is ready to resume rate hikes at future meetings if economic data confirms stable inflation and labor market tensions.
A recent note from Goldman Sachs (NYSE:GS) said: "We expect the Open Market Committee (FOMC) to put a hold on rate hikes at its June meeting next week before considering further rate hikes." At the moment, the Fed's base rate ranges from 5% to 5.25%.
Fed pause expectations received a significant boost earlier this month when Fed members, including Vice Chairman nominee Philip Jefferson, stressed that a pause in June would allow an assessment of the rate hike already made and the impact on lending standards from the latest banking turmoil.
Further tightening of lending standards is expected to help the Fed fight inflation and contain economic growth, reducing the need for further rate hikes.
UBS notes, "In our view, the FOMC is concerned about tightening lending standards," pointing to Fed data that indicates a deterioration in banks' willingness to lend to consumers.
According to Investing's Fed Rate Monitoring Tool, about 75% of traders expect the Fed to pause its rate hike on Wednesday, and about 55% predict the central bank will resume its rate hike in July.
The Fed's SEP, which will accompany its monetary policy decision, is expected to reflect the Fed's expectation of further tightening as inflation and the labor market remain hot.
In previous forecasts in March, the Fed assumed that the base rate would peak in the current range of 5% to 5.25%. Goldman Sachs expects the Fed to raise its rate outlook, assuming another hike to a new peak in the range of 5.25% to 5.5%, as well as economic growth, unemployment and core inflation.
However, some believe that skipping the June meeting could lead to a long pause, as the data is likely to allow the Fed to delay further rate hikes after the June meeting.
Eric Green, chief investment officer at Penn Capital Management, says: "There is a very strong possibility that [the Fed] will complete the rate hike this cycle, but it depends on some important data in the next month and a half." He also adds that if the data show a further decline in inflation, the Fed may continue to pause.
In addition to the Fed's decision and forecasts, Fed Chairman Jerome Powell's comments during the press conference will be analyzed to determine what is likely to induce the Fed to stick to or change its policy after the June meeting.
UBS adds: "Overall, we expect [Powell] to explain that over time the Fed will gather more information and decide on the next policy move depending on economic conditions and their implications for growth and inflation."