The Federal Reserve left interest rates unchanged in September but signaled that additional rate hikes would be appropriate to combat upward pressures on inflation and labor market resilience.
Federal Reserve officials concluded their two-day monetary policy meeting Wednesday with a decision to hold the Fed’s benchmark interest rate steady at 5.25% to 5.5%.
Although FOMC members deemed it appropriate to pause rates in September, more than half of Fed participants have penciled in a benchmark rate of 5.6% by the end of 2023, suggesting at least one more rate increase will come out of the last two meetings of the year, according to the Fed’s updated “dot plot,” or Summary of Economic Projections (SEP), published Wednesday.
“Although the FOMC did not raise the fed funds rate today, the central bank is maintaining a hawkish stance, and the dot plot is more hawkish than it was in June,” PNC Chief Economist Gus Faucher said in an email statement to The Dallas Express.
Dot plot projections place the Fed’s benchmark interest rate at 5.1% by the end of 2024 and 3.9% by the end of 2025.
“The dot plot and the statement point to an additional 25 basis point rate increase this year, and the dot plot shows only a cumulative 50 basis point rate cut next year, compared to a 100 basis point cumulative cut for the June dot plot,” Faucher explained.
Even though the median participant projects two cuts in 2024, Powell says a decision will be based primarily on incoming data.
“The time will come that it’s appropriate to cut. I’m not saying when. But that time will certainly come,” Powell said Wednesday during his scheduled press conference.
PNC’s baseline forecast is that interest rates will remain steady through 2023, with rate cuts starting in March 2024, according to Faucher. However, he notes that the PNC forecast features a mild recession next year.
“This will lead to slower inflation and a deteriorating labor market, which will motivate rate cuts,” Faucher explained, noting that none of the FOMC participants “appear to be projecting a near-term recession in the new dot plot.”
Additional 2024 data points in September’s SEP suggest a higher change in real Gross Domestic Product (GDP), higher Personal Consumption Expenditures (PCE) inflation, lower Core PCE inflation, and a lower unemployment rate.
“With the unemployment rate projection revised lower, the FOMC expects job gains to remain solid in the near term, limiting the amount of disinflation coming from the labor market. This motivates the FOMC’s more hawkish stance compared to June,” Faucher told The Dallas Express.
So far, the U.S. Central Bank has raised its key interest rate 11 times since March 2022, with Wednesday’s policy decision marking the second meeting at which FOMC participants have temporarily paused rates.
“We are prepared to raise rates further if appropriate and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective,” Powell said in August during an economic policy symposium in Jackson Hole.
The next scheduled FOMC meeting will take place from October 31 to November 1. The final policy meeting of the year, which will include a revised SEP, is scheduled to take place December 12 through 13.