Federal Open Market Committee Statement: September 2023
Market Views from the Global Fixed Income, Currency & Commodities (GFICC) group
U.S. Rates Team
In line with market expectations, the Federal Open Market Committee (FOMC) voted to keep the federal funds rate unchanged in a target range of 5.25% – 5.50%. There were no dissents.
- Economic Assessment and Outlook
- The economic assessment remained brief and had minimal changes. The current assessment on activity was upgraded slightly (solid vs. moderate) while job growth was downgraded slightly to reflect the trend in payrolls. Inflation remains elevated and the unemployment rate is low.
- Current Policy and Forward Guidance
- Future policy firming remains data dependent and will depend on the impacts of the cumulative tightening in policy and the lags in which policy impacts the economy.
Summary of Economic Projections:
- The dot plot gave us a refreshed view of the Committee’s expectation for the path of the Fed Funds rate, which showed most participants anticipate 1 additional rate hike this year and a peak policy rate of 5.625%.
- 7 participants anticipate no further rate hikes, up from 4 last quarter. Only one member expects a terminal rate above 5.625%.
- Additionally, the median member expects only 50bps of rate cuts in 2024, down from 100bps last quarter.
- 125bps of cuts in 2025 and 100bps in 2026 are expected to bring the policy rate closer to neutral.
- While the long run dot was unchanged at 2.5%, 7 participants see the long-run dot higher.
- Investors also received FOMC participants’ revised outlooks for employment, growth, and inflation:
- Headline PCE was revised up 10bps in 2023 and 2025 to 3.3% and 2.2% respectively.
- Core PCE was revised down 20bps in 2023 to 3.7%, but up 10bps in 2025 to 2.3%; the number of participants viewing core inflation risks as weighted to the upside rose to 14.
- Growth was upgraded significantly from 1% to 2.1% in 2023 and 1.1% to 1.5% in 2024. Longer term growth was unchanged at 1.8%.
- Unemployment rate estimates were also upgraded significantly with the 2023 median falling from 4.1% to 3.8%, and both 2024 and 2025 falling from 4.5% to 4.1% reflecting increased confidence in a soft landing. No member sees the unemployment rate rising above 4.7%.
Key Takeaways from Chair’s Press Conference:
- On whether we are restrictive enough: The Fed has seen progress but wants to see convincing evidence.
- On why the 2024 dot was revised 50bps higher: This is a median forecast, not a prescribed plan. That said, economic activity has been stronger than expected, and this is what members believe will be appropriate to achieve their inflation goal.
- On the debate for one final hike in 2023: The Fed wants to see progress on inflation for more than 3 months and be convinced it’s heading in the right direction before jumping to a conclusion. Ultimately the decision will come down to the totality of inflation, labor market, and growth data, as well as the balance of risks.
- On the long-term neutral rate: Although the median dot was unchanged for now, there is a possibility it could be higher.
- On soft landing: Despite the upgrade to the Summary of Economic Projections (SEP), Chair Powell said it was not his base case, but he does think it’s possible, and they will move carefully to try to achieve it.
- On the recent rise in gas prices: Its importance will depend on the sustainability of the rise. Energy prices are volatile and a weak signal of the economy, which is why they tend to look past short term moves and target core inflation. Should prices stay high, it can potentially affect the consumer and inflation expectations, which is something the Fed will monitor.
- The risks to monetary policy are now more balanced as the cumulative and lagged impacts slow the real economy, put downward pressure on inflation, and tighten credit conditions.
- As we arrive at the end of the hiking cycle, the government bond market should continue to see demand from investors looking to lock in relatively high risk-free rates. The impact of restrictive monetary policy will continue to slow activity and push prices lower, eventually leading to the consideration of rate cuts early next year. As a result, we expect the 10-year Treasury yield to trend lower into year end.