What does a “hawkish pause” by the Fed mean?

Simply put, the Fed decided not to raise interest rates in June of 2023 but reserved (or threatened with) the right to do so later in the year. “Hawkish” and “threatened” are pretty provocative words, so why are folks brandishing such terms? Mostly because the Fed released their updated “dot plot,” which showed a median expectation for the Federal Funds Rate at 5.6% at the end of 2023. As readers of finance may know, the Fed’s “dot plot” shows the expectations for rates in the future as prognosticated by FOMC members. This “dot plot,” with what is being called an unintended slip by Jerome Powell that described June’s rate pause as a “skip,” has led to speculation of two more quarter-point rate hikes in 2023 if warranted by current economic data.

In coordination with the “dot plot,” Fed members also moved up their future estimates for the Fed Funds Rate to 4.6% in 2024 (previously 4.3% in March 2023) and 3.4% in 2025 (previously 3.1% in March 2023). This increase in the predicted Fed Funds Rate for 2024 and 2025 was possibly precipitated by the Fed’s belief that inflation (especially core inflation - inflation excluding volatile food and energy costs) will come in a little higher (3.9%) than previously predicted (3.6%). Add this stronger inflation forecast with higher GDP and unemployment numbers and one can see why the Fed may be a little “hawkish.” The economy is showing resilience.

Yes, the full effects of the Fed’s interest rate hike policy have a long and variable implementation runway, but, “core” inflation remains pretty hot (as anyone who pays rent knows - by some measures the cost of rent comprises about 60% of core inflations stickiness for May 2023 numbers). “Core” inflation running at 4% means your money is cut in half every 18 years in retirement. Contrast this with inflation running at 2.5%, which means your money is cut in half every 28 years in retirement. Personally, I prefer 2.5% inflation and so should most retirees.

If you have questions about your retirement plan or your investment portfolio in these inflationary times, please feel free to contact Intelligent Investing at www.mynmfp.com/new-clients for a no-obligation consultation.

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