Federal Reserve Maintains Rates Amid Uncertain Economic Forecasts
September 21, 2023
Overview of the Federal Reserve’s Two-Day Meeting
The market is currently deciphering the latest communications from the Federal Reserve following its two-day policy meeting that concluded on Wednesday afternoon. Jerome Powell, the Chair, highlighted the progress made in managing inflation but also expressed caution towards a persistently strong economy and labour market. Notably, the central bank has chosen to maintain the rates unchanged for the second time this year, a decision that has captured the interest of investors keen on understanding the future direction of FOMC’s economic projections.
The Dot Projections
The projected median for the federal funds rate was positioned at 5.6% at the end of the year, hinting at a potential increase – a prospect reflected in the June projection. Policymakers also revised their forecasts for the federal funds rate for the year-end of 2024 to 5.1% as compared to the earlier 4.6%, while the median projection for the end of 2025 saw an uptick to 3.9% from the previous 3.4%. The decreased frequency of rate cuts in 2024 led benchmark indices to end the session on a lower note, with Nasdaq (COMP.IND) witnessing a 1.5% decline. Concurrently, the yield on the 2-year Treasury note (US2Y), an indicator of interest rate expectations, reached 5.118%, the highest since 2006.
Powell’s Thoughts on Inflation
In his press conference, Powell conceded to the inherent uncertainty in forecasting and stressed the need for forecasters to maintain humility. Speaking about inflation, Powell observed that the recent three readings have been positive, yet inadequate for drawing definitive conclusions. He accentuated that if the economy outperforms expectations, it would necessitate a more aggressive monetary policy to re-establish the 2% target.
So far, the Fed appears to have applied sufficient pressure on financial conditions, resulting in less impact on growth and employment compared to previous inflation encounters. This has led the market to expect a ‘soft landing’ for the economy, thereby maintaining stock values for the majority of the year – a situation that contradicts several initial Wall Street forecasts. However, concerns persist regarding the sustainability of this trend. Has the 525 basis points rise in interest rates since March 2022 fully permeated the economy? Will the economy remain resilient if these levels continue through 2024? Further, potential disruptions such as soaring energy costs, student loan repayments, damaging labour strikes, or a government shutdown could also reshape the economic landscape.