The Federal Reserve kept interest rates unchanged during the September meeting, but the dot plot suggests potential rate hikes later this year and maintaining rates above 5% next year. This article provides insights into Powell's views on the endpoint of rate hikes, the impact of oil prices and strikes on inflation, and his perspective on the possibility of an economic soft landing.
Fed keeps its powder dry in September, despite optimistic outlook on growth
A unanimous agreement to maintain interest rates within the 5.25-5.50% range was agreed among FOMC members in late September. The statement was largely consistent with July, the minor tweaks being economic conditions remaining healthy despite a modest slowdown in job growth. The statement also reaffirmed the need for more incoming economic data before making a change to its monetary policy stance.
1. GDP and inflation: US economy continues to outperform expectations
The Fed expressed a slightly more confident view on US economic activity, describing the pace of growth as 'solid' compared to the previous term of 'moderate' used in July. Moreover, employment growth has 'slowed' from what was once deemed 'robust'.
2. Forward guidance: decisions will remain data dependent
The forward guidance section changed marginally since May, where it initially dropped references to expecting "some additional tightening" to reach a sufficiently restrictive monetary policy stance to the main reason for the pause in rate hikes was for members to "assess more information and its impact on monetary policy" in June. The perspective since June was carried forward in the September meeting, highlighting any future monetary policy decisions will be data dependent.
3. Monetary policy statement: balance sheet reduction continues, strong commitment to tamp down inflation
The Fed also decided to carry on with reducing its holdings of US Treasuries, agency debts, and Mortgage-Backed Securities (MBS). The committee remains "strongly committed" to bringing inflation back to the 2% target.
Interest rate 'Dot Plot’ frustrates markets as ‘higher for longer’ rhetoric lingers
The September dot plot for 2023, revealed the median interest rate falling within the 5.5% to 5.75% range, indicating another rate hike before year end is likely, in line with our projections. For 2024 and 2025, the median projections among members were adjusted higher, reaching 5.125% and 3.875%, respectively. This means that over half of the committee believes rates should stay above 5% next year — a more hawkish stance than the pre-meeting market expectation of 4.5% to 4.75%. This demonstrates that there's still a possibility for a rate cut next year, although the magnitude is expected to be minimal, and the timing likely postponed, conveying a commitment to maintaining higher rates for longer to bring inflation back to its long-term target.
