Fed’s Jefferson says not raising rates is not a sign of the end of tightening.

The Federal Reserve’s upcoming policy meeting has everyone wondering if interest rates will remain unchanged. However, Fed Governor Philip Jefferson warns that this doesn’t necessarily mean the central bank’s tightening efforts are over. In fact, skipping a rate hike at the next meeting would allow officials to gather more data before making decisions about additional policy firming.

“A decision to hold our policy rate constant at a coming meeting should not be interpreted to mean that we have reached the peak rate for this cycle.”

While inflation has declined since last summer, Jefferson believes that “core inflation is still too high.” The Fed has been closely monitoring metrics that eliminate the volatile food and energy components. The futures market has been going back and forth on a rate hike or rate pause in recent weeks, with investors currently predicting a pause.

What Does This Mean for the Broader Economy?

Jefferson anticipates a slowing economy for the rest of 2023 amid depleting pandemic-era savings and tighter lending conditions. He does not forecast a recession, but he warns that it takes longer than a year for the economy to feel the full effects of higher interest rates. The Atlanta Fed GDPNow model estimate for the second quarter was lowered from 2.9 percent to 1.9 percent.

Banks could face further stress from the banking turmoil fallout and the central bank’s rising-rate climate, “especially those that are highly exposed to longer-duration assets and have a relatively high ratio of uninsured deposits to total deposits,” Jefferson said.

To Pause or Not to Pause

There has been plenty of debate surrounding the two-day Federal Open Market Committee (FOMC) meeting in June. Loretta Mester, president of the Federal Reserve Bank of Cleveland, does not “see a compelling reason to pause.” On the other hand, Philadelphia Federal Reserve Bank President Patrick Harker believes that policymakers should hit the pause button on a rate hike after 10 consecutive increases.

“I am in the camp increasingly coming into this meeting thinking that we really should skip, not pause, but skip an increase.”

As we wait for the Fed’s decision, it’s important to keep an eye on the broader economic landscape and how it may be impacted by interest rate changes.