Going back more than a year now, investors have expected that the Fed's most recent rate hike would be followed by another at its subsequent monetary policy meeting. Futures trading and the Fed's comments on Wednesday when the FOMC raised its target for the federal funds rate by another 25 basis points suggests that's clearly no longer the case, but that doesn't necessarily imply that a pause in June is a lock. The Fed wants to keep its options open. As chair Jay Powell said repeatedly at his press conference after the meeting, whether to raise rates again in June will be the subject of an ongoing assessment. Let's take a closer look.

A notable change in the Federal Open Market Committee's policy statement was the omission of the phrase that the Fed has been seeking to, in quotes, "attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time." That language had been a fixture of the committee's post-meeting policy statement since November.

Naturally, this omission led to questions of, are we there yet? Does the committee think now that policy is sufficiently restrictive? Powell left the Fed's options wide open as he stated, "we may not be far off, or we may possibly be at that level." Our take is that the Fed is more likely to pause in June than to hike again, but we are not ruling out the possibility of another 25 basis point increase in June.

When asked about the possibility of rate cuts this year, Powell responded more definitively. He noted that it would not be appropriate to cut rates this year if inflation behaves as the FOMC anticipates. While he noted that inflation has moderated somewhat since the middle of last year, he quickly pointed out in his words that, "inflation pressures continue to run high, and the process of getting inflation back down to 2% has a long way to go."

Also telling was his comment that the Fed is "highly attentive to the risks that high inflation poses to both sides of our mandate." We heard this as Powell saying that right now, it's all about inflation. Without price stability, which is one side of the Fed's mandate, we can't sustainably maintain maximum employment, which is the other side of the mandate. This is a Fed that seems willing to accept the risk that its actions to curb inflation may be sowing the seeds of a recession down the road.

The ongoing turmoil in the banking sector came up several times during the press conference, and it was also mentioned in the committee's policy statement. "We see that turmoil mattering for the future path of monetary policy only to the extent that it leads to a material and lasting tightening of lending conditions to businesses and households." We don't think the Fed will refrain from tightening further if needed simply because it sees the banking sector as ill-prepared for higher rates.

If acute stresses re-emerge among banks, we see the Fed as more likely to continue to deal with the issue with its financial stability toolkit, such as the Bank Term Funding Program created in March, instead of with monetary policy. In fact, Powell went as far as to indicate that he doesn't see a conflict between the Fed's monetary policy objectives and its responsibilities towards maintaining financial stability.

So what clues should investors watch for for the June decision and beyond? First and foremost, as Powell said himself, "it's about the data on inflation and indicators of inflation pressures more generally." This includes pressures emanating from the labor market, which he continued to characterize as "very tight," but we should also be particularly attentive to credit conditions. The more they tighten, the less the Fed has to do. So we think it will be an ongoing assessment not just for the Fed, but for investors too.

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