Jerome Powell Signals Caution: Economic Data To Determine If More Interest Rate Hikes Needed

The Federal Reserve made a unanimous decision Wednesday to maintain the federal funds rate within the 5.25% to 5.5% range at its September meeting, a move widely anticipated by market observers.

The spotlight of the day is firmly on the release of the updated Fed summary of economic projections and the “dot plot,” which outlines each member’s stance on interest rate trajectories.

In the September dot plot, the median preference for the fed funds rate at the end of 2023 remained steady at 5.6%, mirroring the projections from June. This suggests the possibility of one more rate hike at either of the last two meetings of 2023.

Looking ahead to 2024, the Fed adjusted its projection for interest rate cuts, now indicating only a half-percentage point reduction, a hawkish adjustment from June’s expectation of a full percentage point decrease.

Growth has been revised sharply higher to 2.1% in 2023, up from 1% in June. Unemployment and inflation forecasts were marginally revised.

Powell Sticks To Data-Dependent Approach

During the press conference that followed the Fed’s announcement Wednesday, Fed Chair Jerome Powell adopted a cautious tone, balancing between hawkish and dovish remarks.

The path to achieving the 2% inflation target has “still a long way to go,” Powell said. He emphasized the Fed’s readiness to raise rates further if needed, and then maintaining high rates until confidence in sustained inflation at 2% is achieved.

“Twelve FOMC members argued that one more rate hike is needed in the upcoming two meetings,” Powell said.

Regarding the Fed’s monetary policy stance, Powell described it as restrictive, exerting a downward influence on economic activity, hiring and inflation. He signaled the Fed’s intention to make rate decisions on a meeting-by-meeting basis, guided by economic data.

“We are in a position of proceeding carefully,” Powell said, aligning with his earlier remarks at the Jackson Hole symposium in August.

Despite a notable upward revision in economic growth to 2.1% for 2023 from the previous 1% forecast in June, Powell refrained from characterizing a soft landing as a baseline expectation, instead referring to it as a possibility and primary objective.

Addressing potential economic risks, Powell named factors such as strikes, government shutdowns, the resumption of student loan payments and higher long-term rates. The impact of a strike on economic output, hiring and inflation will depend on its scope and duration, he said.

Commenting on inflation, Powell highlighted recent positive data readings but stressed the need for sustained improvement beyond a few readings.

When asked about the Federal Reserve’s concerns regarding the recent surge in energy prices, Powell’s said the Fed typically looks through short-term fluctuations.

Lastly, Powell emphasized the growing balance between the risks of overtightening and undertightening, speaking about the importance of finding the appropriate level of restriction in monetary policy.

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	2.9
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

Photo courtesy of Federal Reserve.