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Fed rate decision in September 2023: leaves rates unchanged


The Federal Reserve kept interest rates steady in a decision released Wednesday, while indicating that it still expects another hike before the end of the year and fewer cuts than previously announced. ‘next year.

This latest increase, if realized, would be enough for this cycle, according to projections published by the central bank at the end of its two-day meeting. If the Fed continued this approach, it would carry out a dozen increases since the start of political tightening in March 2022.

Markets hadn’t fully priced in any moves at the meeting, which kept the federal funds rate in a target range of 5.25% to 5.5%, the highest in 22 years. The rate sets what banks charge each other for overnight loans, but also trickles down to many forms of consumer debt.

Although no increase was expected, there was considerable uncertainty about the direction the Federal Interest Rate Setting Committee would take. Judging from the documents released Wednesday, the trend appears to be toward more restrictive policy and a higher, longer interest rate approach.

This outlook initially weighed on the market, with the S&P 500 falling immediately after the announcement. However, stocks oscillated when Fed Chairman Jerome Powell answered questions at a news conference and have recently declined.

“We are in a position to proceed cautiously in determining the extent of further policy tightening,” Powell said.

However, he added that the central bank would like to see more progress in its fight against inflation.

“We really want to see compelling evidence that we have reached the appropriate level, and we are seeing progress and we welcome that. But, you know, we need to see more progress before we want to reach that conclusion,” he said. he added. he said.

Projections published in the Fed’s dot plot show the likelihood of one more increase this year, then two reductions in 2024, two fewer than indicated in the last update in June. This would put the funds rate around 5.1%. The plot allows members to anonymously indicate where they think rates are heading.

Twelve meeting participants proposed an additional increase, while seven opposed it. This puts one more in opposition than at the June meeting. Recently confirmed Fed Governor Adriana Kugler was not a voter at the last meeting. The federal funds rate projection also increased for 2025, with a median outlook of 3.9%, up from 3.4% previously.

Longer term, FOMC members are again talking about a funds rate of 2.9% in 2026. This is above what the Fed considers a “neutral” interest rate, which is not neither stimulating nor restrictive for growth. This was the first time the committee had considered 2026. The expected long-term neutral rate remained at 2.5%.

Economic growth is on the rise

Along with the rate projections, members also sharply revised upward their expectations for economic growth for this year, with gross domestic product now expected to grow 2.1% this year. That’s more than double the June estimate and indicates members don’t expect a recession anytime soon. The GDP outlook for 2024 increased from 1.1% to 1.5%.

The expected inflation rate, as measured by the core personal consumption expenditures price index, also fell to 3.7%, down 0.2 percentage points from June, as did unemployment outlook, now projected at 3.8%, compared to 4.1% previously.

There were some changes in the post-meeting statement that reflect the adjustment in the economic outlook.

The commission described economic activity as “expanding at a solid pace,” compared to “moderate” in its previous statements. He also noted that job creation “has slowed in recent months but remains strong.” This contrasts with earlier terms describing the employment situation as “robust”.

In addition to keeping rates at relatively high levels, the Fed continues to reduce its bond holdings, a process that has reduced the central bank’s balance sheet by some $815 billion since June 2022. The Fed is allowing up to 95 billions of dollars of proceeds from maturities. bonds to be refinanced each month, rather than reinvesting them.

A shift to a more balanced vision

The Fed’s actions come at a delicate time for the US economy.

In recent public appearances, Fed officials have indicated a shift in thinking, from a belief that it is better to do too much to reduce inflation to a new, more balanced view. This is partly due to the lagged effects of rate hikes, which represent the Fed’s toughest monetary policy since the early 1980s.

There are growing signs that the central bank could still achieve a soft landing of reducing inflation without tipping the economy into a deep recession. However, the future remains far from certain, and Fed officials have expressed caution about declaring victory too soon.

“Like many, we expected to see the hawkish stance that Powell signaled at Jackson Hole,” said Alexandra Wilson-Elizondo, deputy chief investment officer of multi-asset strategies at Goldman Sachs Asset Management. “However, the statement was more hawkish than expected. Although some of the past policy tightening is still underway, the Fed may go into wait-and-see mode, hence the pause. However, the main risk remains tarnishing its more great asset, anticipation – the credibility of inflation, which justifies favoring a hawkish reaction function.

The recent rise in energy prices as well as the resilience of consumption are likely why the midpoint rose next year, she said.

“We do not anticipate a single bearish catalyst, although the strikes, shutdown and resumption of student loan payments will collectively sting and cause data irregularities between now and their next move. As a result, we believe their next the meeting will take place live, but it’s not a done deal,” Wilson-Elizondo said.

The employment situation is solid, with an unemployment rate of 3.8% only slightly higher than a year ago. Job openings declined, helping the Fed mark progress in combating the mismatch between supply and demand that at one point saw two positions for every available worker.

Inflation data has also improved, although the annual rate remains well above the Fed’s 2% target. The central bank’s preferred gauge in July showed that core inflation, which excludes volatility in food and energy prices, stood at 4.2%.

Consumers, who account for about two-thirds of total economic activity, have shown resilience, spending even as savings declined and credit card debt topped the 1,000 mark for the first time billions of dollars. In a recent University of Michigan survey, the respective one- and five-year outlooks for inflation rates reached multi-year lows.

Correction: The target federal funds rate is in the range of 5.25% to 5.5%. A previous version of this story incorrectly stated the end point of the beach.



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