Stopping the pace of consecutive rate hikes, what's next for the Fed?

The Federal Reserve's successive rate hikes have finally come to a halt. On the 14th local time, the Federal Reserve announced that it would keep the target range of the federal funds rate unchanged at 5% to 5.25%, in line with the general market expectations. But from the information revealed by the Fed, this is only a temporary hike, far from the end of the time, what will the Fed do next?

The latest published dot plot of the rate hike path shows that the federal funds rate is expected to reach 5.6% by the end of 2023, up 0.5 percentage points from earlier, suggesting that the Fed will likely raise rates twice more during the year.
Cheng Shih, chief economist at ICBC International, mentioned that Fed Chairman Jerome Powell, in a question-and-answer session for the Fed's disagreement with the market, indicated that the Fed needs to raise the interest rate ceiling to a level sufficient to deal with the next recession. In other words, given the impact of past zero interest rate policies on the US economy, the Fed needs sufficient monetary policy space to effectively address potential future risks.
At the same time, the Fed's overall hawkish stance still largely takes into account the complex impact of inflation stickiness on real inflation. Cheng Shih believes that with inflation stickiness remaining strong, there is still the possibility of a phase rebound in US real inflation in the future. Therefore, maintaining a higher and more durable level of interest rates is expected to help stabilise market risk appetite in the long run.
According to Zhong Zhengsheng, Chief Economist at Ping An Securities, on why interest rate hikes were suspended, Powell said that he was not looking for "speed" but was still more concerned about "height", but he avoided using the term "skip hike "(skip) expression, aimed at conveying that the Fed has not yet made a decision on the July meeting. Regarding future interest rate decisions, Powell did not discuss much about continuing to raise rates, but mentioned that rates should not be cut this year, and that they could be cut next year to "keep" real rates unchanged after inflation returns.
However, Chiu Yiu Ting, global market strategist at Kingmaker Asia Pacific (excluding Japan), said that although the dot plot shows that the US federal funds rate will rise by another 0.5 percentage points during the year, he thinks it is unlikely that the Fed will raise rates by another 50 basis points. The dot plot is just a policy prescription for each Fed member, which can sometimes be wrong and can change significantly over time. This dot plot update may be an attempt to lower market expectations for a rate cut this year.
The Fed will not let the economic growth problems, but also not let the financial market risk, but also to successfully complete the monetary tightening cycle, "multiple tasks" under the Fed how to go?
Zhao Yaoting said that if the Fed tightens monetary policy twice more this year, it will really face the risk of excessive tightening, which will lead to a serious economic recession. "This is the largest tightening in the shortest period of time that we have ever experienced. What's more, because of the lag in monetary policy, the US economy has yet to show the impact it has suffered."
Powell said the Fed would likely place a high priority on the pace of rate hikes given the impact of credit crunch risks on financial stability, suggesting that the Fed's two remaining rate hikes for the year would not operate consecutively, according to Cheng Shih. According to his team's projections for the path of tightening credit conditions in the US, higher benchmark interest rates have pushed 30-year mortgage rates to levels above 7% and have kept borrowing rates soaring.
He expects that going forward, once the risk of a credit crunch rises significantly, commercial and industrial loans will be the first to decline, followed by a decline in commercial real estate lending, which will then feed through to a decline in lending to the residential sector, which will lead to a continued contraction in overall credit, weakening the stability of the US financial markets and ultimately affecting the real sector of the economy, sending economic activity into a recessionary cycle.
Zhong Zhengsheng said the Fed's choice to suspend interest rate hikes and lead the market to believe that it will still raise rates in the future is a stopgap measure to ease the pressure of financial tightening without easing financial conditions too quickly.
"We are still inclined to believe that the Fed will complete its last rate hike in July and not cut rates during the year, but the Fed may still retain the option to raise rates again in September. In the second half of the year, US inflation data may improve to a lesser extent, and a fall in inflation would be more contingent on the economy cooling down. The Fed may intend to make the last rate hike 'pending' to have the effect of de facto extending the tightening cycle." Zhong Zhengsheng said.