What you’re not hearing about next week’s June FOMC

Powell and Jefferson have strongly signaled no hike at next week’s FOMC. They are styling it as a “skip” between rate hikes. But as the meeting starts Tuesday, CPI will show a drop in inflation of over 1% in a single month, bringing the Fed 80% of the way to its target. On Wednesday, the meeting’s second day, PPI will show a more than complete return to target. The Fed wants the market to fear more hikes, so this puts them in a quandary about how to position to “dot plot.” Raising the 2023 dot from 5-1/8% from where it is now would clearly signal hikes despite benign inflation data and a credit chill after SVB. Lowering the dot would signal a cut, which they don’t wish markets to anticipate. Leaving it stand signals a cut, too, because it implies a cut after the post-skip hike they want markets to expect. The dots have been a terrible guide to policy. Whatever the FOMC decides, this skip will in fact be a pause, and this pause will in fact be the end of this tightening cycle as inflation collapses into deflation.