Fed signals rates may stay ‘higher for longer’

Fed signals rates may stay ‘higher for longer’

Sept. 21:

As expected, the Federal Open Market Committee did not adjust the target Fed funds rates at the conclusion of its meeting yesterday. The decision was unanimous. Federal Reserve Chair Jerome Powell reiterated the Fed’s commitment to reducing inflation to 2% over the long term and indicated that it will still take quite some time to get there. The Fed continues to take a restrictive stance, reserving the right to take future action — including additional rate hikes, if required — based on new data as it becomes available over time.

The Fed also released updated quarterly economic projections that imply there will be one more 0.25% rate hike this year at either the upcoming Nov. 1 or Dec. 13 FOMC meetings. That view was reinforced by a chart showing 12 out of 19 FOMC participants see such an ease happening.

At the moment, the Fed funds futures market sees a larger chance of the rate hike happening at the Dec. 13 meeting — about a 54% chance — but that view remains quite fluid. The GDP growth forecast for 2023 was 2.1%, up from 1.0% in June, whereas the unemployment rate forecast fell from 4.1% to 3.8%. That pattern of larger GDP growth and lower unemployment than previously forecast continues for 2024.

The FOMC’s press release differed in only two respects from the July 26 release. Economic activity is now seen as expanding at a “solid” pace rather than at a “moderate” pace and job gains “have slowed in recent months but remain strong,” rather than having been “robust in recent months.”

The main takeaway is that rates will be “higher for longer.” The economic projections see only a 0.50% drop in the Fed funds rate from the end of 2023 to the end of 2024, and perhaps 1.25% during 2025. The upper end of the Fed funds target range presently sits at 5.50%. The futures market sees that falling to 5.00% or a bit lower by the end of 2024.

New Fed economic projections as of Sept. 20:

  2023 2024 2025 2026 Longer run
Change in real GDP 2.1% 1.5% 1.8% 1.8% 1.8%
Unemployment rate 3.8% 4.1% 4.1% 4.0% 4.0%
PCE inflation 3.3% 2.5% 2.2% 2.0% 2.0%
Core PCE inflation 3.7% 2.6% 2.3% 2.0%
Fed funds rate 5.6% 5.1% 3.9% 2.9% 2.5%
Prior Fed economic projections from June 14:
  2023 2024 2025 2026 Longer run
Change in real GDP 1.0% 1.1% 1.8% - 1.8%
Unemployment rate 4.1% 4.5% 4.5% - 4.0%
PCE inflation 3.2% 2.5% 2.1% - 2.0%
Core PCE inflation 3.9% 2.6% 2.2% -
Fed funds rate 5.6% 4.6% 3.4% - 2.5%

New unemployment claims drop to 201,000

Weekly initial jobless claims dropped to 201,000 from last week’s 221,000 level. That’s the lowest number of new unemployment claims since the end of January. The less volatile four-week moving average is now 217,000, the lowest that it has been since February.

Philadelphia Fed forecasts regional manufacturing contraction

The Philadelphia Fed Manufacturing Business Outlook lowered its index to -13.50 in September. Any negative number indicates an outlook for contraction in manufacturing in the region supervised by the Philadelphia Fed.

Bank of England pauses rate increases

The Bank of England held its benchmark rate steady after 14 rate increases.

State of the market

Treasury yields rose yesterday after the FOMC meeting based on the prevailing sentiment that rates will be “higher for longer.” They remained elevated after a very low number of initial jobless claims was announced this morning, as that could give the Fed more latitude to take more action down the road or at least maintain high rates for a while.

The Dow traded down this morning.

Economic calendar

Friday, Sept. 22

  • S&P Global Flash US Composite PMI

Treasury calendar

Thursday, Sept. 21

  • $15 billion auction of 10-year Treasury Inflation-Protected Securities

By Mike Kraft, Executive Director and Commercial Real Estate Treasurer for Commercial Banking

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