Federal Reserve:Meetings/2023 September 20

See: Federal Reserve

Summary

• FOMC maintained the target range for the fed funds rate at 5.25%-5.50% as was expected by the market.
• Fed’s dot-plot indicated there is a likelihood of one more rate hike in 2023, followed by two rate cuts in 2024, two fewer than forecasted in July.
• The projections for 2025 funds rate also moved up from 3.4% to 3.9% while GDP projections for 2023 moved to 2.1%, more than double the projetion given in June.
• The FOMC statement noted that future monetary decisions will be informed by incoming data and that they are committed to bringing inflation down to 2%.
• The stament described the economic activity as expanding at a solid pace unlike in previous statements where they described it as moderate.
• Also, unlike in the past where they described they labor market as robust, they said “job gains have slowed in recent months but remain strong.”

Projections

Variable	Median
	2023	2024	2025	2026	Longer run
Change in real GDP	2.1	1.5	1.8	1.8	1.8
- June projection	1.0	1.1	1.8		1.8
Unemployment rate	3.8	4.1	4.1	4.0	4.0
- June projection	4.1	4.5	4.5		4.0
PCE inflation	3.3	2.5	2.2	2.0	2.0
- June projection	3.2	2.5	2.1		2.0
Core PCE inflation	3.7	2.6	2.3	2.0
- June projection	3.9	2.6	2.2
Projected appropriate policy path
Federal funds rate	5.6	5.1	3.9	2.9	2.5
- June projection	5.6	4.6	3.4		2.5

Dot Plot

https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20230920.pdf

Notes

Rates Level

• Pause at this meeting doesn't mean that we have or have not at this time reached that stance of monetary policy that we're seeking, or that this is decided.
• Need to see more progress before be willing to reach the conclusion that rates are at an appropriate level. They will continue to asses the data carefully, the decision at each meeting and certainly at the last two meetings this year, it's going to depend on the totality of all the data. So the inflation data, the labor market data, the growth data, the balance of risks and the other events that are happening out there.
• If the economy comes in stronger than expected, that just means we'll have to do more in terms of monetary policy to get back to 2 percent.
• It may be that the neutral rate has risen. There are people raising their estimates of the neutral rate, and it's certainly plausible that the neutral rate is higher than the longer-run rate (SEP is the longer-run rate). It is possible that the neutral rate at this moment is higher than that and that's part of the explanation for why the economy has been more resilient than expected.
• Currently they are focus in finding the appropiate level of real rates, then they will focus on how long it needs ot stay at that level.
• The time will come at some point, without saying when, that it's appropriate to cut. Part of that may be that real rates are rising because inflation is coming down. Part of it just may be that it'll be all the factors that we see in the economy.
• The risk of over-tightening and the risk of under-tightening have become more equal. The natural, common-sense thing to do is to move a little more slowly as you get closer to it
• Yields rising its not because of inflation, it will probably have something to do with stronger growth, and more supply of Treasuries.

Inflation

• The last three readings are very good readings, but it's only three readings. Well aware that we need to see more than three good readings.
• Bringing inflation back down was going to take the unwinding of distortions to both supply and demand that happened because of the pandemic and the response. In addition, monetary policy was going to help. It was going to help supply side heal by cooling demand off and just, in general, better aligning supply with demand. So those two forces were always going to be important. I think it's very hard to pull them apart. They work together.
• To manage the base effects in inflaiton, they arevalso looking at six months and even three months, but mostly six months inflation.
• Higher energy prices can affect consumer sentiment. It really comes down to how persistent, how sustained these energy prices are. And it may have an effect on consumer expectations of inflation, things like that.

Employment and GDP

• Powell dont agree to say that soft landing is his baseline scenario: I've always thought that the soft landing was a plausible outcome, that there was a path, really, to a soft landing. I've thought that and I've said that since we lifted off. It's also possible that the path is narrowed, and it's widened apparently. Ultimately, this may be decided by factors that are outside our control at the end of the day
• The current GDP growth we are seeing is mostly due to the fact that the consumer's been very robust in spending.
• GDP is not a mandate. The question will be, is the heat that we see in GDP, is it really a threat to our ability to get back to 2 percent inflation?
• The strike, government shutdown, resumption of student loan payments, higher long-term rates, oil price shock, they try toassess all of them and handicap all of them. And ultimately, though, there's so much uncertainty around these things.
• Energy prices being higher, that is a significant thing. Energy prices being up can affect spending. It can affect spending over time. A sustained period of higher energy prices can affect consumer expectations about inflation.
• Soft landing is a primary objective, that's what they've been trying to achieve for all this time. However, the worst thing they can do is to fail to restore price stability.
• If there is a government shutdown and it lasts through the next meeting, then it's possible we wouldn't be getting some of the data that we would ordinarily get and we would just have to deal with that. And I don't know. It's hard to say in advance how that would affect that meeting.
• Economy have been stronger than expected, one of the recent explanations is that household balance sheets and business balance sheets have been stronger than we had understood, and so that spending has held up. But they are not sure about that. The savings rate for consumers has come down a lot. The question is whether that's sustainable. It could just mean that the date of effect is later. It could also be that for other reasons the neutral rate of interest is higher for various reasons, or it could also just be that policy hasn't been restrictive enough for long enough.

Projections

• SEP is not a plan that is negotiated or discussed, it's accumulation of individual forecasts from 19 people, and then what you're seeing are the medians.
• Forecasts are highly uncertain. Forecasting is very difficult.
• Seeing progress without higher unemployment for now, and thats what the new projections show. But, that is not guaranteed. There may come a time when unemployment goes up more than that.

Market Expectations

Markets are expecting a rate pause in september with a 99% probability, expections for a pause also in november are 71% and 60% in december.

Commentary

Roger Ferguson

• They will leave the door open for 1 more rate hike
• They want to be careful to not stop to early, and continue to be data dependent
• There is still a possibility of a recession, and more certaintly of slower growth

Richard Fisher

• There is a huge fiscal deficit currently, which is inflationary and stimulative to the economy.
• Still with all the irresponsable fiscal spending, and interest payment going up, money is still coming to the US. The dollar is still relatively strong.
• The economy still playing catch up to the fact wages are still behind inflation.

HPS Investment Partners

• Mareket are pricing a lot of rate cuts, they dont think this is likely
• About a 1/3 of tresuary market is going to reprice over the curse of the next year. There is a lot of supply coming, which will keep yield high.
• There is more risk for inflation to be higher to what the FED is hoping for. This will impact margins, investment cyles and cash flows for the higher for longer scenario.
• Defaults in high yield will be dependant on where inflation settles in.