The projections released by the Federal Reserve on Wednesday, June 15–the so-called Dot Plot–show a central bank that sees a tough 2022, especially on interest rates and inflation, but a definite improvement in 2024.
This fits with the developing Wall Street narrative that sees inflation dropping in 2023 and 2024 and the Fed looking to cut interest rates in 2024.
Let’s run through the major categories in the projections: GDP growth, PCE inflation, and the short-term Fed Funds interest rate.
At its March 16 meeting, the last time the Fed released these Dot Plot projections, the central bank called for 2.8% real growth (that is growth after subtracting inflation) in GDP in 2022, 2.2% growth in 2023, and 2.0% growth in 2024.
The June 15 Dot Plot shows the bank ratcheting down its projections for 2022 economic growth to just 1.7%. But leaving its projections for 2023 and 2024 at 2.2% and 2.0%, respectively.
The Fed’s view of inflation in 2022 has become much more negative than in March. At the earlier meeting, the Fed projected 2022 inflation at an annual rate of 4.3% by the end of 2022. At its June 15 meeting the Fed was looking at 5.2% inflation in 2022. (The Fed looks at an inflation measure called PCE, Personal Consumption Expenditures, and not the more familiar CPI inflation index.)
Interestingly, especially to the financial markets, the Fed is projecting that its 2022 efforts to fight inflation with higher interest rates will be almost immediately successful. The bank is projecting that inflation will fall to a 2.6% annual rate by the end of 2023–that’s down from the March projection of a 2.7% inflation rate for the end of 2023. By the end of 2024, the inflation rate will be down to 2.2%. The March projection called for inflation of 2.3%.
To sum up the inflation picture put forth by the Fed: Inflation in 2022 will be much worse than expected by the March projection, but in 2023 and 2024, the inflation rate will be lower than the central bank projected in March. This will occur while economic growth in the June projections for 2023 and 2024 remains at the same level as in the March projections.
(My initial reaction to this is “What are Fed economists smoking? And where can I get some?)
And finally, interest rates.
The March Dot Plot saw the Fed Funds rate ending 2022 at 1.9%. That’s up, big time, in the June projection to 3.4%. Interestingly for those who are following along with me on the developing Wall Street narrative on a schedule for interest rate increases, that 3.4% projection comes down to 75 basis points in June, 75 in July, 75 in September, and then a drop to 25 basis points in November and December.
Short-term interest rates in 2023, according to the June Dot Plot, climb slightly–just 40 basis points–to end 2023 at 3.8%. That’s up from the March projection of 2.8% by the end of 2023.
And then interest rates fall–a Federal Reserve interest rate cut?!–to 3.4% by the end of 2024. (Although that’s still a higher end of 2024 projection than the 2.8% projected in March.
You can see why stocks rallied on June 15. The Fed dangled 2024 interest rate cuts in front of Wall Street.