The Fed will hold interest rates, as expected by much of the market, but has revealed that it expects rates to stay once again higher for longer than the market expected. The Fed expects to be well above neutral rates potentially into 2026. Notably, real interest rates (the difference between the actual rate and the inflation rate) are expected to rise next year if the Fed’s projections are correct. This is expected to put additional pressure on the economy — an economy that is already showing many signs of weakness. The Fed has also revealed another rate hike in the cards before the end of the year — something that wasn’t priced-in to the CME’s FedWatch rate expectation tool.
Here’s What the Fed has Said so Far:
- The Federal Reserve kept its key interest rate unchanged but hinted at another hike due to ongoing inflation and a strong economy.
- The benchmark short-term rate remains at 5.25% to 5.5%, marking the second meeting without a rate increase since March 2022.
- Fed policymakers anticipate a quarter-point rate increase this year, reaching 5.5% to 5.75% in 2023, although some experts disagree, expecting no further hikes.
- In 2024, the Fed predicts a rate cut to 5% to 5.25%, delayed from their earlier projection.
- The Fed’s focus remains on lowering inflation to the 2% target and monitoring economic developments.
- The Fed upgraded its view of the economy, noting “solid” growth and a strong labor market, despite recent job market slowdowns.
- The Fed’s preferred measure of inflation is expected to remain at 3.3% by year-end and drop to 2.5% by the end of 2024.
- The unemployment rate is projected to end the year at 3.8%, and wage growth remains above the level needed to lower inflation.
- The Fed’s interest rate hikes aim to cool down an overheated economy and reduce inflation, but they may have long-term effects on economic growth.
- Inflation, driven by various factors, remains above the Fed’s 2% target.
- The Federal Reserve’s interest rate decisions impact various financial aspects, including credit card debt and savings account interest rates.
- The Fed’s monetary policy decisions have raised mortgage rates, contributing to higher interest rates.
- The Fed’s dot plot indicates that most officials expect interest rates to range from 4% to 4.75% in 2023 and lower to 3% to 4% by 2024.
Fed Chair Powell’s Speech — the Cliff Notes
Powell largely stuck to the script today, with today’s favorite word being “cautious.” Powell said the word cautious more than 10 times during his speech and Q&A session, usually in an effort to dodge incoming questions. Powell noted that during the last meeting, when he answered a question about when cuts were coming, he didn’t mean “the Fed wouldn’t cut rates over the next year” — he simply meant that decisions aren’t made that far ahead.
Powell continuously reiterated that the Fed’s dot plot and hiking structure would be made on a case by case basis, however he did acknowledge several factors outside of the Fed’s control which could force his hand. Of note, Powell mentioned rising energy costs (which he said the Fed often tries to look through by leaning more on core inflation), the UAW strike (which threatens to raise the cost of automobiles), and a potential looming government shut down which could threaten the Fed’s ability to receive data.
Here are the rest of the bullet points from Powell’s speech, which again, largely was just a reiteration of the Fed’s 2PM statement.
- Consumer spending is strong, and the Federal Reserve isn’t hoping for a slowdown.
- The Fed is waiting for convincing evidence of inflation coming down before ending rate hikes.
- A soft landing for the economy is plausible but not guaranteed, according to Powell.
- The Fed sees marginal improvements in the economic outlook, with increased GDP growth and reduced unemployment forecasts.
- Powell views a recent moderation in the labor market as positive for fighting inflation.
- The Fed’s dot plot suggests one more interest-rate hike before the end of the year.