You Know It When You See It

While the Fed kept rates unchanged at today’s meeting, between the press conference and forecast updates, Powell and Co. gave plenty of ammo to keep the financial press busy speculating about what may come at the next FOMC meeting this Fall.

Today’s Fed statement itself was a non-event, with minor wording changes noting that the economy is growing at a “solid” rather than “moderate” rate, and employment gains have “slowed” but “remain strong”. It’s in the updated economic projections (the “dot plots”) – which give a peek at how the Fed expects the economic and rate landscape to evolve moving forward – that things got interesting.

The Fed upped its economic growth forecasts for this year and next to 2.1% and 1.5%, respectively, compared to June estimates of 1.0% and 1.1%. Along with stronger growth, the Fed projects a more modest rise in the unemployment rate to 3.8% (prior forecast of 4.1%) and slightly higher inflation of 3.3% (prior forecast of 3.2%). Interestingly, they lowered their forecasts for “core” inflation – which strips out the volatile food and energy components – to 3.7% for year-end 2023, and they have core inflation sitting at 2.6% by the end of 2024. We would take the over on that bet.

What do these outlook changes mean for the path of rates? One more rate hike is anticipated by the majority of policymakers before the end of the year, just as they forecasted in June, but they now believe that rates will then need to remain higher for longer. June projections showed a total of one hundred basis points (bps) of rate cuts anticipated by FOMC members in 2024, but that has now been revised to expected cuts of 50 bps. On balance the dot plots showed a more hawkish outlook.