As expected, the Federal Reserve maintained current interest rates and signaled an anticipated rate increase by year-end in the Fed September meeting.
The central bank’s projections were released after the Fed September meeting that lasted two days. The policymakers indicate that this cycle will conclude if the final hike occurs. If the Fed proceeds, it will mark twelve rate increases since initiating policy tightening in March 2022.
Powell wants to be careful when deciding on more policy changes. He wants to see strong proof that inflation is getting better before making decisions. The central bank likes the progress so far but needs more before deciding anything.
Market reacts to Fed’s rate hints
The market expected the federal funds rate to stay between 5.25% and 5.5%, the highest in about 22 years. This rate affects consumer loans, and people thought it wouldn’t change. But recent documents hint that they might make borrowing harder and keep rates high for a while.
This perspective negatively impacted the market, resulting in a nearly 1% decline in the S&P 500 and a 1.5% drop in the Nasdaq Composite. As Fed Chair Jerome Powell fielded questions in a news conference, stock prices fluctuated.
Fed’s dot plot
The Fed’s dot plot showed they plan to raise rates again this year and cut them twice in 2024, which differs from what they said in June.
This would put the rate at about 5.1%. In the Fed September meeting, all twelve supported another hike, but seven were against rate cuts, which is more than in June.
Rate Projections and Sentiment Shifts
The projection for the fed funds rate in 2025 also saw an upward revision, with the median estimate now at 3.9%, up from the previous 3.4%. This adjustment indicates a more optimistic outlook for interest rates in 2025.
FOMC projected a 2.9% funds rate for 2026, exceeding the Fed’s growth-stimulating neutral rate. It’s the first look into the 2026 forecast, with the long-term neutral rate at 2.5%.
Citigroup economist Andrew Hollenhorst noted Chair Powell and the Fed as hawkish, expecting inflation to ease despite a strong job market.
However, he warned that if job market imbalances persist, inflation might stay high, posing challenges for the Fed’s inflation goals.
Key Highlights from the Fed September Meeting
At The Fed September meeting, officials grappled with a nuanced economic landscape. Members in the Fed September meeting raised their growth forecasts for this year significantly, now predicting a 2.1% GDP growth in 2023, double the June estimate, indicating no immediate recession concerns.
The Fed September meeting held critical discussions on interest rates and inflation trends. The 2024 GDP outlook revealed that it improved to 1.5% from 1.1%, reflecting increased optimism. Core inflation is expected to be 3.7%, down 0.2% from June.
Unemployment is now projected at 3.8%, down from 4.1%. The post-meeting statement now calls economic activity “solidly advancing” instead of “moderate,” acknowledging slower job growth in recent months but still robust. These changes align with the updated economic outlook.
The Fed is keeping high-interest rates and reducing its bond holdings, cutting about $815 billion since June 2022. Instead of reinvesting, they’re letting $95 billion from maturing bonds expire each month. These moves come during a sensitive time for the U.S. economy.
Fed September meeting unveiled insights into the central bank’s cautious approach. In recent statements, Fed officials have changed their perspective from aggressively fighting inflation to a more balanced approach. This shift is partly due to the delayed effects of their substantial rate hikes, the most robust monetary policy since the 1980s.
There are growing signs that the central bank’s aim to control inflation without triggering a recession could be achievable. However, the future remains uncertain, so Fed officials are being cautious about declaring success.
Their main goal is to achieve a smooth economic transition, but they are vigilant because economic dynamics can be unpredictable.
Surprising hawkish turn after Fed’s Jackson Hole hint
Alexandra Wilson-Elizondo, Deputy Chief Investment Officer at Goldman Sachs Asset Management, expected a hawkish stance following Chair Powell’s hints at Jackson Hole. However, the released statement turned out even more hawkish than expected.
With past tightening still affecting the economy, the Fed is taking a cautious “wait and see” approach, resulting in a rate pause. Their top priority remains maintaining anti-inflation credibility, emphasizing the need for a prudent, more hawkish response.
This assessment suggests that recent energy price increases and robust consumption have influenced the median projection for the following year.
No impending negative trigger is evident, but strikes, the shutdown, and resumed student loan repayments may introduce data fluctuations before the next decision.
Post-Fed meeting uncertainty
After the Fed’s September meeting, uncertainty lingers regarding future economic policies. The upcoming meeting is seen as significant but uncertain. The labor market remains strong, with a 3.8% unemployment rate. Job vacancies have declined, indicating progress in the supply-demand balance. Although, the inflation is above the Fed’s 2% target, with core inflation at 4.2% in July, excluding food and energy.
Consumers keep spending despite lower savings and record-high credit card debt of $1 trillion. However, a University of Michigan survey revealed lower expectations for short- and long-term inflation rates. This creates uncertainty for the upcoming meeting.
