As expected, the Federal Reserve’s Open Market Committee unanimously held the fed funds target steady at a range of 5.25% to 5.50% at its Sept. 20 interest rate decision.
Acknowledging the recent spate of better-than-expected economic developments and persistent inflationary pressures, FOMC participants reiterated a further rate hike is likely before year end. In the Summary of Economic Projections (“Dot Plot”), the median member of the FOMC anticipates cutting rates just half a percentage point in 2024, compared to a full percentage-point in cuts seen previously.
The median Dot on the Dot Plot projects the fed funds rate holding above its longer-run steady-state value of 2.5% through the fourth quarter of 2026, reinforcing the Fed’s message that they plan to keep interest rates “higher for longer.”
The Dot Plot’s median Dot significantly upgraded the projection for annual real GDP growth in the fourth quarter of 2023 to 2.1% from 1.0% earlier. Next year’s growth forecast was also revised up notably to 1.5% from 1.1%. In line with brightening economic prospects, monetary policymakers expect the labor market to fare better than previously anticipated over the forecast horizon. 2023’s expected headline inflation was raised a notch to 3.3%, while core inflation was lowered by two-tenths to 3.7%. The FOMC did not change its 2024 headline and core inflation projections of 2.5% and 2.6%, respectively.
The earliest data on the economy’s momentum in September are mixed. S&P Global’s Flash U.S. Composite PMI for September showed momentum slip, with the index edging down to a 7-month low and just barely above the threshold that separates expansion from contraction.
The weakness was broad-based with the Services PMI slipping to an eight-month low, while the Manufacturing PMI rose but was still in contraction for the fifth consecutive month. On the other hand, unemployment insurance claims fell to the lowest since the first quarter in the latest releases covering the first half of September, implying economic momentum may have firmed a bit.
Bill Adams is a senior vice president and chief economist at Comerica. Waran Bhahirethan is a vice president and senior economist at Comerica.
