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Sunday, September 17, 2023

FOMC Preview: No Change to Policy Expected

by Calculated Risk on 9/17/2023 08:11:00 AM

Most analysts expect there will be no change to FOMC policy at this meeting, keeping the target range for the federal funds rate at 5‑1/4 to 5-1/2 percent.

On the meeting this week from BofA:
"We expect the Fed to stay on hold at the September FOMC meeting, consistent with recent Fed communications and current market pricing. Recent data should leave the Fed encouraged by ongoing disinflation but concerned about re-acceleration in inflation because of the strength in activity. ... The biggest focus of the September meeting should be the updated Summary of Economic Projections (SEP). We expect the 2023 median policy rate forecast to show one more 25bp hike, for a terminal rate of 5.5-5.75%. Perhaps the most important forecast is the 2024 median, which we think will shift up by 25bp to 4.875%, reflecting just 75bp of cuts next year."
emphasis added
And from Goldman Sachs economists:
"[T]he story of the year so far is that solid growth has not derailed either the rebalancing of the labor market or progress in lowering inflation, as one might have feared. In fact, measures of labor market tightness have now returned to roughly their pre-pandemic levels, on average. This means that the desired rebalancing of supply and demand is now largely complete and that further sustained below-potential growth is likely no longer necessary.

At their September meeting, Fed officials are likely to make fairly straightforward revisions to their economic projections that reflect these recent developments. For 2023, we expect a substantial upward revision to GDP growth (+1.1pp to +2.1%) and moderate downward revisions to the unemployment rate (-0.2pp to 3.9%) and core inflation (-0.4pp to 3.5%)."
Economic projections will be released at this meeting. For review, here are the June projections.  Since the last projections were released, the economy has performed better than the FOMC expected, and inflation was slightly below expectations.

It is likely that projections of the neutral Fed Funds rate will be increased again.  This has implications for mortgage rates!  See: Lawler: Is The “Natural” Rate of Interest Back to Pre-Financial Crisis Levels? and The "New Normal" Mortgage Rate Range

The BEA reported real GDP increased at a 2.1% annual rate in Q2, after increasing at a 2.0% annual rate in Q1.  And real GDP is increasing around 3.0% annualized in Q3. Even with slower growth in Q4 - partially due to the likely government shutdown and the UAW strike, the FOMC projections for year-over-year growth in Q4 2023 will be revised up sharply, likely to over 2%.

GDP projections of Federal Reserve Governors and Reserve Bank presidents, Change in Real GDP1
Projection Date202320242025
June 20230.7 to 1.20.9 to 1.51.6 to 2.0
March 20230.0 to 0.81.0 to 1.51.7 to 2.1
1 Projections of change in real GDP and inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated.

The unemployment rate was at 3.8% in August. To reach the mid-point of the FOMC projections for Q4 2023, the economy would likely have to lose a significant number of jobs in Q4.   The FOMC's unemployment rate projection for Q4 will likely be revised down.

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents, Unemployment Rate2
Projection Date202320242025
June 20234.0 to 4.34.3 to 4.64.3 to 4.6
March 20234.0 to 4.74.3 to 4.94.3 to 4.8
2 Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

As of July 2023, PCE inflation increased 3.3 percent year-over-year (YoY), up from 3.0 percent YoY in June, and down from the recent peak of 7.0 percent in June 2022.  Projections for PCE inflation will likely be revised down.

Inflation projections of Federal Reserve Governors and Reserve Bank presidents, PCE Inflation1
Projection Date202320242025
June 20233.0 to 3.52.3 to 2.82.0 to 2.4
March 20233.0 to 3.82.2 to 2.82.0 to 2.2

PCE core inflation increased 4.2 percent YoY, up from 4.1 percent in April, and down from the recent peak of 5.4 percent in February 2022.  This includes PCE measure of shelter that was up 7.8% YoY in July (even though asking rents are soft).  Core PCE inflation likely declined to around 3.8% in August, and the FOMC will revise down their projections. 

Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents, Core Inflation1
Projection Date202320242025
June 20233.7 to 4.22.5 to 3.12.0 to 2.4
March 20233.5 to 3.92.3 to 2.82.0 to 2.2