As expected, the FOMC announced on Wednesday that it would keep interest rates unchanged, a first since the beginning of 2022. However, the updated projections from the governors show that the vast majority expects the federal funds rate to reach 5.6% by the end of this year, compared to 5.1% in March. In other words, the Fed is anticipating two rate increases by the end of the year.

This more hawkish tone raises several questions. The first one is, why not increase the rates now? The recent debt ceiling debacle may have had an effect as it was difficult for the Fed to escalate warnings of higher rates. And by the time the default had been firmly avoided, the central bank had entered its “quiet period” before the next meeting.

Another factor is the need to ensure that the banking sector remains on a solid footing after the turmoil that began in March. Even though a major crisis was averted, the risk of significantly tightening credit standards that could impact economic activity remains open.

The second question is, why such a hawkish tone when Powell had opened the door to a pause in May? The economic situation remains challenging to interpret. Unemployment is not rising as much as anticipated. Inflation is still firm. Growth is strong, and the underlying momentum is favourable.

By suggesting that there are still two rate hikes to come, the Fed has at least convinced everyone that there will be no rate cut this year and probably not in the first part of 2024. Considering that it takes an average of nine months to measure the full impact of a rate hike on the economy, nothing should happen before June of next year.

However, by projecting rates at the end of 2024 to drop by 100 basis points, the Fed signals a recession in 2024.