September 20, 2023 | 15:08
FOMC Policy Announcement and SEP — Onward November
The FOMC kept the fed funds target range unchanged at 5.25%-to-5.50% today, as expected, after lifting it by 25 bps last meeting. This repeats the first part of the skip-hike sequence established three months ago. And, importantly, the Fed has left the door open for a potential second-leg rate hike come the next announcement on November 1.
As anticipated, the policy statement repeated the forward guidance of the prior two meetings. It said: “In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.” The “may be appropriate” phrase affords the Fed a lot of flexibility. It fit both July’s hike and September’s skip and, therefore, can accommodate either policy choice six weeks from now.
Elsewhere in the statement, the economic assessment said “activity has been expanding at a solid pace” vs. “moderate” before (an upgrade). There was acknowledgement that “job gains have slowed in recent months but remain strong” and, as before, a terse “inflation remains elevated” concluded the paragraph.
In the Summary of Economic Projections (SEP), the median forecast for the fed funds target range at the end of this year is 5.50%-to-5.75%, still one (25-bp) hike away as before. Seven participants now see the 5.375% midpoint as the peak, and no one is projecting two moves. Furthermore, the (expected) higher-for-longer theme was evident in the median’s profile. The amount of easing by 2024-end was reduced from 100 bps to 50 bps, with 10 of 19 participants still having an above-5% call. With 2026 projections introduced, the 2025 forecasts were likely sharpened. And there’s still 125 bps of easing during that year, but of course ending 50 bps higher at a 3.875% midpoint.
It's noteworthy that the policy rate is projected to remain above its longer-run level through the end of 2026. In the presser, Chair Powell said that the current neutral rate could be higher than its longer-run mark, which it would be if inflation is proving to be more stubborn than expected. Meanwhile, five participants now project that the longer-run level rests above 2.75%, compared to three before. We have an inkling that this will be a theme in upcoming SEPs.
The median call for real GDP growth this year was doubled to 2.1% y/y (Q4/Q4) from 1.0% y/y… that’s what you call ‘resilient’. This contributed to a reduction in the jobless rate to 3.8% (Q4) from 4.1%. Amid stronger growth and higher oil prices, total PCE inflation was revised up a tenth to 3.3% y/y (Q4/Q4), but core inflation was revised down two-tenths to 3.7% y/y, partly thanks to a subdued June-July starting point. In the out years, the forecast changes followed a theme of stronger real GDP growth, lower unemployment rates, and in 2025, a bit higher headline and core inflation. Core PCE inflation is still 2.3% y/y by 2025Q4... that's what you call 'stubborn'.
Bottom line: The Fed could raise policy rates another notch in November, and it depends on... you guessed it... the data flow between now and then.