The Fed held its policy stance unchanged as expected at their September 20 decision, and signaled through the policy statement and the Dot Plot that most members of the Federal Open Market Committee (FOMC) see the next move as more likely a hike than a cut. However, voting members of the FOMC are about evenly divided regarding further rate increases, and most members see rate cuts on the horizon in 2024 if inflation’s underlying trend continues to cool. Chair Powell’s opening statement at the press conference after the decision implies that he leans toward holding rates steady near term while keeping another hike on the table, saying, “We are in a position to proceed carefully in determining the extent of additional policy firming that may be appropriate.”
The September decision held the fed funds target steady at a range of 5.25% to 5.50%. The Fed also held unchanged the rates that they pay on commercial banks’ reserve balances and on cash deposited at the Fed by money market funds, as well as the rates the Fed charges commercial banks through their lending programs.
The quarterly Dot Plot (formally called the Summary of Economic Projections or SEP) shows that the median member of the FOMC thinks another quarter percentage point hike is probably appropriate before year-end, but that cuts also are likely to be appropriate in 2024 if inflation and economic growth slow as they expect. The median dot for the federal funds rate at year-end 2023 was 5.6%, reinforcing that another quarter percentage point hike is likely at the November or December FOMC decision. The median dot at the end of 2024 is 5.1%, but almost half (nine of 19) of FOMC members believe the fed funds rate should be below 5% by the end of 2024.
It’s worth remembering that not every dot represents a voting member of the FOMC. The Fed Board’s Governors skew more dovish than the Regional Fed Presidents, and unlike the Presidents, the Governors vote at every decision. So the Dot Plot implies that the vote to make another hike by year-end 2023 is closer to a 50-50 split than a simple count of the dots would suggest. In addition, it implies that a narrow majority of voting members of the FOMC probably see the fed funds rate under 5% by the end of 2024.
The median dot on the Dot Plot upgraded the forecast for real GDP growth in 2023 to 2.1% from 1.0% in the June Dot Plot, mostly reflecting stronger-than-expected economic data released since June, and raised the 2024 real GDP forecast to 1.5% from 1.1%. The Dot Plot lowers the unemployment rate forecast to 3.8% at year-end 2023 from 4.1% in the June projection, implying no further increase in the unemployment rate from August’s level. The forecast for unemployment at the end of 2024 was cut to 4.1% from 4.5%. The Dot Plot shows that most FOMC members see a clearer path for the U.S. economy to dodge a recession, with inflation coming back to the Fed’s target without a serious downturn.
The median dot in the Dot Plot made only small changes to the inflation projections. PCE inflation at year-end 2023 is projected at 3.8%, down from 4.1% in June, and seen slowing to 2.5% at year-end 2024. Core PCE is seen at 3.7% at the end of this year and 2.6% at the end of next year.
The FOMC revised the forward guidance in their policy statement to be consistent with the Dot Plot to show most FOMC members see the next change in policy is more likely a hike than a cut. The September statement reads: “In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective.”
The July policy statement was more open to the possibility that the Fed could end rate hikes after that decision’s quarter percentage point increase. It said that the Fed would monitor that same grab-bag of factors which influence growth and inflation “in assessing the appropriate stance of monetary policy,” rather than “the extent of additional policy firming that may be appropriate.”
Put simply, FOMC members are still prepared to hike rates further if they deem it necessary to keep inflation tracking back toward their target, especially since oil prices and house prices have risen recently—Chair Powell said in the press conference after the September decision that the Fed “looks through” fluctuations in oil prices at core inflation to monitor the outlook for prices, but that’s difficult to do in practice since oil prices influence airfares, shipping costs, and other energy-intensive services which are components of most core inflation indices.
But the Fed is not pre-committing to further hikes. The Dot Plot shows that FOMC members see inflation headed in the right direction, with core inflation slowing. They are also closely watching signs of a cooler labor market, like slowing payrolls growth, falling job openings, and August’s uptick in the unemployment rate.
After the Fed decision, Comerica is making a small upward revision to its interest rate forecast. Comerica continues to forecast for the Fed to hike the policy rate by a quarter percentage point at the next decision November 1, unchanged from the prior forecast. The Fed is then seen cutting interest rates by a quarter percent per quarter beginning in June, ending 2024 with the fed funds target at a range of 4.75% to 5.00%. This holds unchanged the forecast for the fed funds rate at the end of 2023, and revises up the forecast for the fed funds rate at the end of 2024 by a quarter percentage point relative to Comerica’s prior forecast.
Bill Adams is a senior vice president and chief economist at Comerica. Waran Bhahirethan is a vice president and senior economist at Comerica.