Federal Reserve MeetingFed Leaves Rates Unchanged
Policymakers kept interest rates on hold, but stayed open to another increase this year. They also don’t expect to cut rates next year by as much as previously implied, with the economy running “stronger than we expected,” according to the Federal Reserve chair, Jerome H. Powell.
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20
%
18
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1970
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20
%
18
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1970
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Federal Reserve officials left interest rates unchanged on Wednesday, a decision that gives policymakers more time to assess whether they have raised interest rates enough over the past 18 months to fully wrestle inflation under control.
But policymakers also released a fresh set of economic projections suggesting that they still expect to make another rate increase before the end of 2023 — and that borrowing costs are likely to remain higher than officials had previously expected in 2024.
In all, the Fed’s decision and its outlook suggested that a resilient economy is keeping central bankers both optimistic about growth and firmly in inflation-fighting mode. “What it reflects is that economic activity has been stronger than we expected,” Jerome H. Powell, the Fed chair, said in a news conference.
Fed officials have already raised interest rates substantially since March 2022 in a push to cool the economy and wrangle inflation: They kept them steady at a range of 5.25 to 5.5 percent this week, the highest level in 22 years.
And policymakers expect to nudge rates even higher before the end of the year, to 5.6 percent. While they had previously anticipated that they would lower borrowing costs back to 4.6 percent in 2024, they now expect to lower them only to 5.1 percent next year.
Fed officials project another rate increase this year
Circles represent where officials project the target rate to be by the beginning of each year. Darker, overlapping circles indicate multiple officials predicting the same rate.
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That tweak came as the economy’s staying power surprises economic officials. The Fed also expects stronger growth, lower unemployment and slower inflation at the end of 2023 than they had previously anticipated, their release showed.
Taken together, the projections painted a sunny picture, one in which a robust economy is managing to digest higher borrowing costs without tipping into — or even getting close to — a recession. At the same time, inflation is steadily fading from its rapid pace last year. The combination is giving Fed officials the breathing room they need to be patient, and it is increasing the odds that they might be able to wrangle price increases without inflicting a lot of economic pain.
“It does read very much like a Goldilocks,” said Blerina Uruci, chief U.S. economist at T. Rowe Price. “We’re basically getting a deceleration in inflation with less pain on the economic front.”
When it comes to growth, “they are not seeing the deceleration that they would have anticipated, given the amount of monetary policy tightening that they have done,” Ms. Uruci said.
By continuing to predict another rate increase this year, the Fed is keeping its options open. Inflation is showing signs of finally cooling, but risks still threaten to keep prices climbing too quickly for comfort.
Fed officials have meetings in early November and mid-December, leaving them time to raise rates further in 2023 if they think that doing so is necessary.
When the Federal Reserve meets, sometimes the news is in its statement. Sometimes it’s in the chair’s answers to reporters’ questions. Today, the news was in the projections: Fed officials, as was widely expected, kept rates unchanged, but indicated they are still likely to raise rates one more time this year, and will cut rates more slowly in 2024 and 2025 than they previously expected.
In his news conference, Jerome H. Powell, the Fed chair, mostly avoided making any additional headlines. His main message was that the Fed is pleased with the recent progress on inflation but isn’t ready to declare victory yet, and is keeping its options open.
Here are a few other takeaways:
Mr. Powell reiterated several times that the slowdown in inflation has given the Fed room to “proceed carefully” rather than continuing to raise rates aggressively.
But pushing in the other direction: Growth has remained stronger than expected, which is why the Fed is reluctant to conclude that its work is done.
Mr. Powell is still hoping for an economic “soft landing,” but he left no doubt about his top priority: bringing inflation back under control. “The worst thing we can do is fail to restore price stability,” he said.
The Fed chair provided very little insight into when the central bank will begin cutting rates, or even how it will decide that the time has come. “You know sufficiently restrictive only when you see it,” he said.
Mr. Powell acknowledged the various threats facing the economy, including the autoworkers strike, rising oil prices and the risk of a government shutdown. But he didn’t seem overly concerned, noting that the economy has remained resilient.
Bottom line: Fed watchers mostly seem to have judged that this was a “hawkish hold” on rates. Investors seem to agree, with markets falling modestly in response to the news. The Fed may be pleased with that reaction.
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Real estate experts cheered the pause and cautioned against further rate increases. “With fewer job openings, slowing job gains, and softening core consumer price inflation, the Fed must consider the potential economic damage arising from any future rate hikes,” said Lawrence Yun, the chief economist of the National Association of Realtors.
And that’s a wrap on the news conference. My first reaction is that Powell seemed determined not to make any news today. And he largely seems to have succeeded.
Powell is asked about the distributional consequences of higher interest rates, which could be viewed as regressive: Those with long fixed-rate mortgages are better able to cope, while those who have to survive on credit cards face a “punitive” cost of borrowing.
He answered that those people, typically on low or fixed incomes, are also most hurt by rising prices, since they’re spending all of their money on things like food, fuel, and housing. “It is for those people, as much as for anybody, that we need to restore price stability.”
Powell acknowledges yet again that the economy hasn’t cooled down as much as expected in response to the Fed’s rate hikes. Why might that be? Powell says there are several explanations: Maybe households and businesses had built up enough savings to withstand higher rates. Maybe the “neutral rate” of interest has moved higher. Or maybe rates just haven’t been high enough for long enough to slow down the economy.
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SKIP ADVERTISEMENTPowell acknowledged that some measures of consumer distress — such as the number of auto loans in default and the Census Bureau's high-frequency measurement of food insecurity — are moving upwards as interest rates rise, especially since continued spending has been fueled in part by high-interest credit card debt.
But, he said, those measures are rising from “historically” low levels due to pandemic-era fiscal support. “They’re now moving back up to normal. They’re not at troublingly high levels,” he said.
Stock prices appear to have settled into a modest sell-off with the S&P 500 0.4 percent lower for the day with about an hour left of trading. In interest rate markets, there has been some shift to acknowledge the higher-for-longer reading of the Fed’s new economic projections.
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Powell explains why the Fed doesn’t look too closely at energy prices, saying that they “mostly don’t tell you a signal about where the economy is going” and how tight the economy is. But he adds that they’re important for consumer sentiment and inflation expectations.
Powell tries again to explain why the Fed didn’t raise rates today but might still raise rates this year. In a nutshell: Policymakers think rates are close to high enough, if they aren’t high enough already, so it makes sense to proceed cautiously.
He stresses that the last three inflation reports have been positive, but that it will take more evidence to convince the Fed that its work is done.
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SKIP ADVERTISEMENTAsked directly why the Fed’s forecasts seem out of step with those of other economists on Wall Street and elsewhere, Powell responds again by saying these projections are all inherently very uncertain, but that the Fed’s economic personnel are very high quality. “I think they stand up well against other forecasters.”
“Forecasts are highly uncertain. Forecasting is very difficult,” said Powell. “Forecasters are a humble lot with much to be humble about.”
Powell reiterated that he is not trying to guide investors on when the central bank may begin cutting interest rates. But the adjustment to the central bank’s projections has prompted bets in the markets that rate cut will come in the second half of next year, at the earliest.
Investors' bets can change markedly. At the start of this year, some investors were betting on the Fed being ready to cut interest rates at today's meeting.
Powell bristles at the suggestion that the Fed isn’t focused on avoiding a recession. “A soft landing is a primary objective and I did not say otherwise,” he says. “That’s what we’ve been trying to achieve all this time.”
That said, Powell continues, “the worst thing we can do is fail to restore price stability.” That is what would put the Fed’s longer-run goals in jeopardy, he says.
“Energy prices being higher is a significant thing,” Powell says, adding that higher, sustained energy prices over time can affect spending.
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SKIP ADVERTISEMENTPer Powell's list of risks it's worth noting that the Fed is generally focused on indicators that strip out the volatile sectors of food and energy. On Wednesday, the national average for unleaded gasoline was $3.88 per gallon, according to AAA, the highest level in nearly a year. That’s far below last year’s peak, which ticked over $5 per gallon, but is still far above historical averages.
Asked about uncertainty in the economy, Powell ticks off a list of current or looming threats: the autoworkers strike, a potential government shutdown, the resumption of student loan payments, higher long-run interest rates and a recent jump in oil prices.
“There is a long list,” he notes dryly.
But, Powell says, the economy “seems to have significant momentum.”
This was an interesting exchange. People are going to wonder: Was he saying that the impact of those factors are just so uncertain that it’s not worth factoring them into projections moving forward?
Just how long will the Fed keep interest rates elevated? “If you look at our forecast, you will see we have the first rate cut in May of ’24,” said Douglas G. Duncan, the chief economist at the mortgage giant Fannie Mae. That aligns with the firm’s forecast for a mild recession in the United States, he said.
One of the big challenges facing the Fed right now is that it sets “nominal” interest rates. But what matters for the economy are “real” rates — essentially the nominal rate minus inflation. That means that if inflation keeps falling, and the Fed keeps nominal rates unchanged, “real” rates will rise by default, effectively doing more to slow down the economy.
Powell is careful not to give any hints about when the Fed might start cutting rates. But he stresses that the Fed can only tell if it has done enough based on what happens in the economy.
“You know sufficiently restrictive only when you see it,” Powell says.
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SKIP ADVERTISEMENTIn response to a somewhat pointed question, Powell says it’s possible that the “neutral rate” has risen in the short-run but not in the long-run.
In other words, it’s possible that higher rates aren’t doing as much to slow the economy right now as economists expected. But that doesn’t necessarily mean that rates will have to stay higher in the longer run.
Notably, many economists disagree, and believe that the long-run neutral interest rate has in fact risen.
Under pressure to explain why the likely path of rates moved higher, Powell said that it was a response to the incoming data. “What it reflects is that economic activity has been stronger than we expected,” he said.
What a lot of analysts are noting is that there are some clear potholes in the coming months, from student debt payments resuming to the potential for a government shutdown.
It’s not necessarily surprising that the first two questions have focused on the question of whether the Fed will raise rates again this year. But personally I’m much more interested in what he says about how the Fed is thinking about next year.
Worth noting Powell says that “economic activity has been stronger than we expected.” The fresh economic projections and today’s decision make clear they are seeing a very resilient economy.
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SKIP ADVERTISEMENTAs the Q&A begins, Powell emphasizes that the Fed hasn’t decided whether to raise rates again this year. He notes that “a majority of members believe it is more likely than not that it will be appropriate” to raise rates again. But several members think the Fed has already done enough — and no one has made a final decision.
“Really what people are saying is let’s see how the data come in,” Powell says.
Powell says that the progress made on inflation in recent months means that the Fed is “in a position to proceed carefully.” He stresses that policymakers will adjust their plans if economic data doesn’t come in the way they expect.
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Stocks nudged higher on Wednesday morning as investors, eager for new signals on the direction of the economy, awaited fresh forecasts from the Federal Reserve.
The S&P 500 rose 0.1 percent, after slipping 0.2 percent on Tuesday. The index has trundled sideways for much of the summer as investors tried to balance signs that inflation was falling and consumers remained resilient with less encouraging news like the threat of a government shutdown, the resumption of student loan payments and the autoworkers’ strike.
The Fed is widely expected to hold rates steady on Wednesday, with investors’ attention focused on the central bank’s revised economic projections — namely, the “dot plot” of interest-rate forecasts — and remarks by Fed chair Jerome H. Powell.
“Instead of focusing on the federal funds rate at this meeting, market participants will be keeping a close eye on the Fed’s dot plot and Fed chair Jerome Powell’s post-meeting press conference for hints on the future path of monetary policy,” said Sam Millette, Fixed Income Strategist for Commonwealth Financial Network.
However, Mr. Powell is expected to keep his options open, treading a cautious path between acknowledging the effects of the central bank’s efforts to tame inflation so far, while reiterating more work may be needed.
Despite investors expecting the Fed to hold interest rates steady at its meeting today, Wall Street is split on whether the central bank will raise rates again before the end of the year.
“I think they are purposefully giving themselves room to maneuver,” said Greg Peters, co-chief investment officer of PGIM Fixed Income.