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The Federal Reserve kept interest rates on hold at 5.5%, to the surprise of nobody on Wall Street. The statement was a little changed from July.
Markets had been pricing in a 99% chance of no move after two employment and CPI reports gave the FOMC breathing room to wait for more data on the progress of tightening. But that does not mean officials are ready to call it quits.
Societe Generale economist Stephen Gallagher says, “Fed officials are unwilling to declare victory in fighting inflation, nor are they willing to claim a soft landing has been achieved. Instead, with the inflation rate still well above 2% and employment markets still tight, the Fed wants to keep a door open for possible hikes.”
With the decision baked in, the market’s focus turned to the summary of economic projections, which include the dot plot of rate projections.
The median dot for 2023 stayed at 5.625%, still indicating the possibility of one more quarter-point hike to close out the year.
But the real action was a move higher in the dots for 2024, where the median moved up to 5.125% from 4.625%. That’s taking out two rate cuts, enforcing the higher-for-longer message many economists were expecting from a Fed that is still concerned about the tougher final stretch in getting core inflation to the target of 2%.
The median FOMC member is looking at 2026 for when inflation reaches those levels, but it is also predicting an economy growing at trend.
“Importantly, the Fed is feeling more optimistic,” economist Justin Wolfers tweeted. “The median unemployment forecast fell to 3.8% for 2023 (down from 4.1%) and 4.1% for 2024–25 (vs. 4.5% previously). Core PCE inflation forecast for Q4 2023 ticked down to 3.7% from 3.9%.”
But Schwab’s Kathy Jones said the Fed’s view that it can “get inflation down over the next few years with positive GDP growth and only modestly higher unemployment… seems hopeful.”
Looking to the markets, traders looked less confident about the Fed being done, with the odds of them staying on hold through the December meeting dropping closer to 50/50. Swaps pushed out a first rate cut to September.
The bond market reacted strongly. The 2-year Treasury yield (US2Y), most closely tied to the fed funds rate, touched 5.15%, the highest level since 2006. That’s more than 10 basis points higher than it was before the statement. The 10-year (US10Y) rose back to 2.35%.
Stocks are eased back.
The S&P 500 (SP500) fell -0.1%, with the Nasdaq (COMP.IND) off -0.4% and the Dow (DJI) up +0.4%—a bit of an outlier with point gains from UnitedHealth (UNH) and Amgen (AMGN).
The dollar (DXY) wiped out most of its pre-meeting losses.
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