At today’s meeting the Federal Reserve’s Open Market Committee left the central bank’s policy interest rate at 5.25% to 5.50%. In its Dot Plot forecast the Fed signaled one more interest rate hike for 2023. In its forecast the bank said that rates would end 2023 at 5.6%. That’s roughly 25 basis points higher than today.
None of this was surprising. The markets were looking for the Fed to stand pat at this meeting. Odds of that according to the CME FedWatch Tool were above 98% heading into the meeting. The market was calling the possibility of one more interest rate increase in 2023 essentially a coin toss.
But the Fed did surprise for 2024. Earlier in the year financial markets had been looking for the Fed to cut interest rates in 2024 four. In the days before this meeting the consensus had moved to three cuts i 2024. Today’s Dot Plot forecast reduced the to wo cuts in 2024 and projected that the police rate winked end 2024 at 5.1%. In the June forecast the rate was seen at 4.6% at the end of 2024.
So higher for longer. Exactly what the financial markets weren’t hoping to hear.
And higher than expected for longer than expected.
The other parts f the Dot Plot explained the Fed’s thinking on interest rates. The bank projected that the U.s. economy will grow y 2.1% in 2023. That’s up from a projected 1% in June, And they expect the unemployment rate to end 2023 at 3.8%. That’s also more optimistic than the previous projection of a year-end 4.1%.
Inflation as you might expect from those numbers, is projected to run a little hotter with the PCE inflation rate ending 2023 at 3.3% versus a 3.2% projection in June. To me that 3.3% projection still seems low if the economy and labor markets are going to be as strong as the Fed now expects. That 3.3% projected PCE inflation rate has got, in my opinion, a big element of downside risk.
Bu you’ll notice that the possibility of a recession has moved out of sight at the Fed.
Today, September20, the yield on the 10-year Treasury climbed 5 basis points to 4.41%. The yield on the 2-year Treasury popped to 5.18%.