After raising the federal funds rate target at its July meeting to 5.25–5.5%, the FOMC held rates constant at its September meeting. Incoming data in the form of inflation, stronger labor markets, and the Beige Book convinced the Committee, as reflected in its Summary of Economic Projections (SEPs), that rates would stay higher for longer, through 2025. At the September meeting, the FOMC didn’t have aggregate GDP data for the third quarter, so it had to rely upon secondary sources. The Beige Book summary of aggregate activity, as well as key segments, indicated that seven districts showed an increase in growth, some easing of prices, increases in labor markets, mixed consumer spending, and a decline in residential real estate. The price data, in particular, combined with information on aggregate CPI and PCE, suggests that prices are still increasing, albeit at a slower pace. This view was confirmed with the September 29th release of the PCE for August. Although the headline number increased 0.4% during the month, driven mostly by the cost of oil and gasoline, core PCE was up only 0.1%. Since Fed policy has little impact on energy prices, one can expect that while the FOMC is targeting headline PCE, it will give greater weight to assessing the impacts of its recent policy moves on the path for core PCE inflation, which has been trending down since April. It should also be noted that the September 28th release of the third GDP estimate for the second quarter remained firm at 2.1%, and the estimate for Q1 was revised up to 2.2%, confirming the view that the economy was on reasonably firm footing and showing no signs of a recession.
The SEPs reveal significant changes in the Committee’s view of the path for an economy that is stronger but is experiencing a longer delay in reflecting previous policy moves. The most striking numbers are the 2.1% percentage point increase in GDP growth for 2023, followed by a 1.5% percentage point increase for 2024, above the levels previously expected. Similarly, the outlook for the jobs market is also stronger, with projected unemployment for 2023 reduced from 4.1% to 3.8% and from 4.5% to 4.1% in both 2024 and 2025, while inflation holds steady. It would be interesting to know what the underlying inflation dynamic is assumed to be in these forecasts, in the face of a stronger economy. One possibility is that the Committee is assuming that past rate moves have yet to have their full impact on realized inflation, a point that Chairman Powell made at the post-meeting press conference. The main conclusion from these forecasts is that rates are expected to remain higher for longer than was expected at the June FOMC meeting.
Much has been made in the press of the Committee’s hawkish pause after the meeting, based upon the so-called dot chart, which revealed that, despite the pause, 12 participants expected one more rate move later in the year, as compared with 7 who thought the current rates would remain through 2023. If one can believe the hawk/dove scale recently released by InTouch Capital Markets (https://www.itcmarkets.com/hawk-dove-cheat-sheet-2/), 3 voting members are considered doves while 8 are considered hawkish. (President Bullard has resigned and did not attend the September FOMC meeting.)
Rate decreases, if they occur at all, now first appear in 2024. This issue received considerable attention at the post-meeting press conference, as did the prospect for a soft landing. Chairman Powell indicated that a soft landing was both a real possibility and a goal in the process of trying to bring inflation down without causing significant unemployment – the Committee’s two statutory mandates. The Committee felt that it could afford to wait to see whether it had achieved the necessary degree of tightness to achieve its goals, especially given the lags in policy and the view that the full effect of past rate hikes was yet to be felt. Those factors, combined with the continued strength in GDP and labor markets, meant that it was most likely, in the Committee’s view and as reflected in the SEPs, that rates would remain higher for longer than was previously forecast, without posing undue risks to a soft landing.
Robert Eisenbeis, Ph.D.
Vice Chairman & Chief Monetary Economist
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