By Andrew Moran
The Federal Reserve voted to leave interest rates unchanged at the September Federal Open Market Committee (FOMC) policy meeting, keeping the benchmark fed funds rate at a range of 5.25 percent and 5.5 percent, the highest in 22 years.
Central bank officials left the door open for one more rate hike before the year is over and indicated smaller rate cuts in 2024.
Rate-setting Committee members noted that U.S. economic activity had been growing at a “solid pace.” Although employment gains have slowed in recent months, the unemployment rate is still low, according to the FOMC.
“Inflation remains elevated,” the FOMC said in a statement.
“The U.S. banking system is sound and resilient. Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks.”
Officials will continue to assess “the cumulative tightening of monetary policy” when determining if additional policy firming is necessary to achieve the central bank’s 2 percent inflation target.
“The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals,” the statement noted.
FOMC policymakers will maintain their efforts to trim their holdings of Treasury and mortgage-backed securities.
Heading into the Committee meeting, the futures market had widely anticipated the central bank would hit the pause button.
Looking ahead to the last two meetings of 2023, investors mostly expect a rate pause, according to the CME FedWatch Tool.
Financial markets were mixed following the announcement. The Dow Jones Industrial Average rose about 0.4 percent, the S&P 500 was flat, and the tech-heavy Nasdaq Composite Index shed 0.4 percent.
U.S. Treasury yields were also mixed, with the benchmark 10-year yield down nearly 2 basis points to around 4.35 percent. The 2-year yield added 1.5 basis points to above 5.12 percent. The 30-year bond shed close to 3 basis points to 4.4 percent.
The U.S. Dollar Index (DXY), which gauges the greenback against a basket of currencies, erased nearly all of its intraday losses and remained above the crucial 105.00 threshold. Year-to-date, the index is up about 1.5 percent.
Summary of Economic Projections
The Federal Reserve published the latest Summary of Economic Projections (SEP). While it contained multiple revisions by Fed Board members and Fed bank presidents, the central bank still indicates one more rate hike this year before it ends the hiking campaign. The SEP information shows the median policy rate at 5.6 percent by the year’s end.
Over the longer term, the median view of the fed funds rate is seen at 5.1 percent next year, up from the June projection of 4.6 percent, suggesting that any monetary easing will be at a slow and steady pace. The median projection of the policy rate is expected to be 3.9 percent by the end of 2025, up from 3.4 percent. It is then seen falling to 2.9 percent.
Officials anticipate that the real GDP growth rate in 2023 will be 2.1 percent, up from the June forecast of 1 percent. They also expect the economy will expand by 1.5 percent in 2024, up from 1.1 percent in the previous SEP. The real GDP growth rate in 2025 is still expected to be 1.8 percent.
The unemployment rate is seen to rise to 3.8 percent this year, a downward revision from 4.1 percent. The jobless rate was also adjusted down to 4.1 percent in 2024 and 2025. Policymakers projected jobless rates of 4.5 percent in both years.
According to the SEP data, personal consumption expenditures (PCE) inflation, which is the Fed’s preferred inflation metric, was altered higher from 3.2 percent to 3.3 percent for 2023. Looking ahead to 2024 and 2025, PCE inflation is anticipated to be 2.5 percent and 2.2 percent, respectively. Core PCE, which strips the volatile food and energy components, was changed lower from 3.9 percent to 3.7 percent. for the year. Core PCE was left unchanged in 2024 at 2.6 percent and was adjusted higher from 2.2 percent to 2.3 percent in 2025.
A Long Road to 2 Percent
Speaking to reporters at the post-FOMC press conference, Fed Chair Jerome Powell reiterated that achieving the central bank’s 2 percent goal has “a long way to go,” adding that “we are prepared to raise rates further if appropriate.”
“The majority of participants believe that it is more likely than not that it will be appropriate for us to raise rates one more time in the two remaining meetings this year,” Mr. Powell told the press.
But accomplishing the 2 percent objective will also require a period of below-trend growth and softening labor conditions, Mr. Powell added.
In the meantime, the Fed will keep interest rates in restrictive territory until policymakers are confident inflation is sustainably moving down to 2 percent.
“Real interest rates are positive. Now, they’re meaningfully positive. And that’s a good thing,” he said. “We need policy to be restrictive so that we can get inflation down to target.”
As the Fed inches toward its inflation goal, the central bank maintains the ability to proceed with caution.
While he did not attribute significant importance to one more rate hike, Mr. Powell asserted that stronger economic activity is the primary reason for needing to do more with interest rates.
On the broader economy, Mr. Powell made a point to say that a soft landing is not the Fed’s baseline expectation.
What Fed Officials Were Saying
In the weeks before the September policy meeting, officials were discussing the possibility of leaving interest rates alone and leaving them elevated to assess economic conditions.
John Williams, head of the New York Fed, said in an interview with Bloomberg that the Fed’s monetary policy was “in a good place,” but any future decisions will have to depend on the economic data.
“I think we’ve gotten monetary policy in a very good place in terms of we have a restrictive stance of policy,” he said.
“We’ll have to keep watching the data carefully analyzing all of that and really asking ourselves the question: is this sufficiently restrictive,” Mr. Williams added. “Do we need to maybe raise rates again to make sure that we’re keeping that steady progress in terms of shrinking imbalances in the labor market and bring inflation back down?”
But Dallas Fed Bank President Lorie Logan told the Dallas Business Club at Southern Methodist University earlier this month that additional policy tightening might be warranted because of “excess inflation.”
“Forecasts are inherently uncertain. My base case, though, is that there is work left to do,” she said. “After the unacceptably rapid price increases of the past several years, I’m not yet convinced that we’ve extinguished excess inflation.”
Multiple measurements have highlighted that price inflation has reaccelerated.
In August, the consumer price index (CPI) climbed to 3.7 percent on a year-over-year basis. The producer price index (PPI) also rose to an annualized pace of 1.6 percent.
Last month, input prices in the manufacturing sector swelled, according to the Institute for Supply Management’s (ISM) Purchasing Managers’ Index (PMI). Moreover, the Census Bureau reported that export prices soared 1.3 percent month-over-month in August.
Consumer inflation expectations have been mixed.
The New York Fed’s Survey of Consumer Expectations (SCE) showed that one-year-ahead inflation expectations rose from 3.5 percent to 3.6 percent. But the University of Michigan’s year-ahead Inflation Expectations Index tumbled to 3.1 percent from 3.5 percent.
