After pausing brieﬂy in June, the FOMC decided to execute another rate hike at their meeting in July, which brought the Fed Funds rate to its present range of 5.25 – 5.50%.
Speeches by FOMC members leading up to today’s announcement conﬁrmed a bias towards pausing again at their September meeting, so almost no one expected any other outcome. In fact, this morning, the CME Group’s FedWatch Tool, which is tied to the Fed Funds Futures market, showed a 99% probability of a pause today.
It came as no surprise that a pause was what was delivered. Today’s decision was to hold the Fed Funds rate steady at the range of 5.25 – 5.50%.
The FOMC Statement
There was some question as to whether certain ‘hawkish’ language would remain in the statement. Speciﬁcally, some questioned whether sentence fragments such as “In determining the extent of additional policy ﬁrming thatmay be appropriate to return inﬂation to 2 percent over time…” would be amended. However, the statement itself remained largely unchanged, continuing to reﬂect the same hawkish bias that was present in July.
New Economic Projections
There were, however, some significant changes within this quarter’s Statement of Economic Projections (SEP)document, the most significant of which have been highlighted below:
1| Real GDP in 2023 is projected to be over twice as high as the prior forecast, with 2024 GDP also projected higher.
2| Unemployment projections were adjusted lower for 2023, 2024, and 2025 and will only have to rise to 4.1% in order to bring inﬂation back down to the Fed’s 2% goal.
3| The median year-end dots within the 2024 and 2025 dot plot projections for the Fed Funds rate were each raised 50bp, eﬀectively taking 50bp of cuts oﬀ of the table in 2024.
4| One more rate hike is expected this year by 12 of 19 FOMC members.
The Press Conference
Fed Chair Powell speciﬁed in his opening remarks that although they have tightened 525bp over the course of this cycle, “the full eﬀects of our (monetary policy) tightening have yet to be felt.”
He stated, “Given how far we have come, we are in a position to proceed carefully as we assess the incoming data and the evolving outlook and risks.” The phrase “proceed carefully” was used several times in his responses to questions.
When asked why the Fed Funds rate is not yet suﬃciently restrictive, he replied that the SEP implies one more rate hike in 2023 is more likely than not and added, “We’re awaiting further data. We want to see convincing evidence that we have reached the appropriate level. We’ve seen progress, and we welcome that, but we want to see more progress.”
When asked at what point do we start to think that the neutral rate is actually higher: You only know where the neutral rate is when you get there, and that’s another reason we’re moving carefully. It may, of course, be that the neutral rate has risen, and it is certainly plausible that the neutral rate is higher than the longer-run rate.
“It’s a good thing that we’ve seen a meaningful rebalance in the labor market without an increase in unemployment.”
“A soft landing is not a baseline expectation, but I’ve always thought that it was a plausible outcome and there’s a path to it.”
The Market Reaction
Treasury yields are up across the board, with the 2-year Treasury Note reaching 5.18%, a level not seen since 2006.
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