Commentary Directory

The FOMC decided to keep the federal funds rate steady between 5.25% and 5.50% while continuing its balance sheet runoff. Recognizing recent economic vigor, the Fed noted that while job gains have decelerated, they remain robust with a persistently low unemployment rate. Updated economic projections reveal a median GDP growth of 2.1% for 2023, a strong upgrade from the 1.0% estimated in June. The unemployment rate forecast was downgraded slightly to 3.8% (previously 4.1%), and the core PCE inflation estimate was also downgraded slightly to 3.7% (previous 3.9%). A major update to the projections was a shift in how the Fed sees the Fed funds rate developing in 2024. Instead of next year ending with a rate around 4.6%, the FOMC now sees that rate being around 5.1% at the end of 2024 which reduces the expectation of rate cuts next year down from 100 bps to just 50 bps.

With the Fed pause being almost entirely priced in, that move surprised no one. The big news was in the adjustment to the projections which suggested that FOMC members shifted their view of the economy and inflation in the few months between June and September. The message is that rates will have to be “higher for longer” to help rein in the strong US economy to restrict and inflationary pressures that may crop up. Additionally, it does appear that we should be looking out for another quarter point hike this year as the FOMC maintained its forecast for a 5.6% Fed funds rate at the end of 2023.