The Federal Reserve maintained the federal funds rate at its existing range of 5.25% to 5.5% during its September meeting, as largely predicted by the market.
The Fed statement reiterated that additional policy firming to bring inflation to the 2% target may be appropriate depending on the upcoming economic data, effectively keeping the possibility of a future rate hike on the table.
The Federal Open Market Committee (FOMC) updated its quarterly economic forecasts and the “dot plot,” which illustrates each member’s preferred trajectory for interest rates.
Fed Dots Sound More Hawkish Than Expected
In terms of the dot plot, the median projection for 2023 remained consistent with June’s figures at 5.6%, indicating a preference for one more rate increase, potentially occurring in either the November or December meeting.
The median dot for 2024 showed a federal funds rate of 5.1%, implying a reduction of 50 basis points in rates from current levels. However, such a preference is effectively pricing out two rate cuts that had been anticipated according to June’s Fed economic projections. This shift could be perceived as hawkish by the market.
Furthermore, there has been a notable upward revision in the economic growth forecast for 2023, with the new projection at 2.1%, a significant increase from the 1% forecasted in June.
Investors and the markets are now eagerly anticipating the press conference by Fed Chair Jerome Powell at 2:30 p.m.
Fed Summary of Economic Projections – September 2023
| 2023 | 2024 | 2025 | 2026 | |
| Change in real GDP | 2.1 | 1.5 | 1.8 | 1.8 |
| June projection | 1.0 | 1.1 | 1.8 | |
| Unemployment rate | 3.8 | 4.1 | 4.1 | 4.0 |
| June projection | 4.1 | 4.5 | 4.5 | |
| PCE inflation | 3.3 | 2.5 | 2.2 | 2.0 |
| June projection | 3.2 | 2.5 | 2.1 | |
| Core PCE inflation | 3.7 | 2.6 | 3.9 | 2.0 |
| June projection | 3.9 | 2.6 | 2.2 | |
| Memo: Projected appropriate policy path | ||||
| Federal funds rate | 5.6 | 5.1 | 3.9 | 2.9 |
| June projection | 5.6 | 4.6 | 3.4 |
Market Reactions Ahead of Fed Powell Press Conference
Stocks fell minutes after the Fed statement, while the U.S. dollar rose, supported by a rise in short-term Treasury yields, with the 2-year yields rising above 5.10%.
The SPDR S&P 500 ETF Trust SPY shed about 0.2%, while the tech-heavy Invesco QQQ Trust QQQ fell 0.3%.
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