Jordan Jackson:              

Hi, my name is Jordan Jackson, global market strategist at JP Morgan Asset Management. Welcome to On The Minds Of Investors. Today's post asked the question, are markets more in line with fed rate hike expectations? The Federal Open Market Committee, or FOMC, voted unanimously to raise the federal funds target range by 75 basis points to three to three and a quarter percent. The tone of the committee remains talkish, given policy makers are highly attentive to taming inflation that runs well above its 2% target.

Strong job growth and persistent excess demand for labor suggests a soft landing is still possible. However, aggressive fed tightening keeps the probability of a recession sometime next year elevated.

The committee delivered forward guidance through its summary of economic projections or SEP and provided a much more hawkish median dot plot. Relative to their June forecast, the FMC sees the federal funds rate ending 2022 at 4.4% and hitting a 4.6% terminal rate in 2023 with rates remaining restrictive until at least 2025. Real GDP growth projections were revised lower from 1.7% year over year in the fourth quarter of 2022 to just 0.2% and cut to 1.2% by the fourth quarter of 2023, followed by a more sustainable 1.5% to 2% rate through 2025.

Expectations for year over year PCE deflator inflation for the fourth quarter of this year were revised higher with headline up to 5.4% from 5.2% and core up to 4.5% from 4.3%. Thereafter, inflation is still expected to cool steadily through 2025.

The fourth quarter of this year unemployment rate forecast was nudged up to 3.8% compared to 3.7% in June. 2023 and 2024 forecast, so a more significant boost to 4.4% in each year from 3.9% and 4.1% respectively.

In our view, the key message is from the updated SEP in dot plot are first, sticky inflationary pressures and owners equivalent rent, or OER, rental CPI and wage growth will keep core inflation stubbornly elevated into next year, while decline in energy and us gasoline prices should lead to a larger decline in headline consumer prices. The slide scene in both real GDP and productivity in the first half of the year do not reflect an economy in the recession. That said, the committee recognizes that businesses and consumers will come under pressure as the economy enters a period of higher rates.

Third, the persisted excess demand for labor is expected to keep the rise in the unemployment rate modest, but higher unemployment is a necessary evil to kill inflation.

Lastly, the committee will lift rates to 4% to 5% next year, and doesn't expect to begin lowering rates until 2024. The statement language was nearly identical to July and notably reiterated that ongoing increases in the target range will be appropriate keeping the door open for another 125 basis points and increases by the end of the year.

At the press conference, Chairman Powell repeated his Jackson hole messaging, noting that restoring price stability will keep rates restrictive for some time, but at some point a slower pace of rate hikes will become appropriate. For now, the FMC remains a laser focused on inflation and keeping inflation expectations in group. Interestingly, Powell never made use of the word recession, but did acknowledge that there will likely be a period of sustained period of below trend growth. When asked about cutting rates, Powell stated that the FMC would need to see below trend growth and more balanced labor market and clear evidence that inflation is heading back toward its 2% target before considering such a move. This is not expected to come soon as Powell stated we are just entering the lowest level of restrictive.

In addition, little mention of the balance sheet runoff suggest the committee will maintain its current pace of QT for now. For investors since the August CPI report, rates have adjusted higher reflecting the more hawkish path for interest rates. Given this, the short term outlook for equities remains challenging while high quality intermediate to long duration core bonds may be the most attractive sector is within a fixed income.