Evening Brief – 09.18.23
FOMC Preview: Watch SEP
The Federal Open Market Committee is unlikely to raise the fed funds target rate at its September 19-20 meeting, keeping the range of 5.25% to 5.50%, but will likely retain the hawkish option for additional tightening in the statement, economic predictions and press conference.
While the economic outlook has clearly improved over the last six months, owing mostly to labor market resiliency and strong private-sector balance sheets, there are significant obstacles on the horizon.
With the possibility of a reacceleration of inflation in the fourth quarter, the committee is likely to keep one more rate hike on the table. The labor market is slowing, but the Fed may need to reduce its projections for how quickly the unemployment rate will climb.
As a result, all eyes will be on the revised Summary of Economic Projections (SEP), which is expected to show significant changes in the central bank’s gauge of the economy.
Bank of America noted that “Perhaps the most important forecast is the 2024 median, which we think will shift up by 25 basis points to 4.875%, reflecting just 75 basis points of cuts next year.”
Since the last projections were given in June, the economy has fared better than anticipated and inflation has been slightly lower than expected.
After expanding at a 2% annual rate in the first quarter, real GDP grew at a 2.1% annual rate in the second quarter, according to the Bureau of Economic Analysis. In the third quarter, real GDP increased by roughly 3% year on year.
Even if GDP slows in the fourth quarter, due in part to a potential government shutdown and the United Auto Workers strike, the FOMC’s expectations for year-over-year growth in the fourth quarter will almost certainly be revised up to more than 2%.
In August, the unemployment rate was 3.8%. To meet the FOMC’s midpoint forecast for the fourth quarter of 2023, the economy would have to shed a considerable number of jobs in the fourth quarter. The FOMC’s forecast for the unemployment rate will likely be revised downward.
As of July 2023, PCE inflation increased 3.3% year-over-year, up from an annualized rate of 3% in June, and down from the recent peak of 7% in June 2022. As such, projections for PCE inflation will likely be revised down.
PCE core inflation increased 4.2% annualized, up from 4.1% in April, and down from the recent peak of 5.4% in February 2022. This includes PCE measure of shelter that was up 7.8% year-over-year in July. Core PCE inflation likely declined to around 3.8% in August, and the FOMC will revise down their projections.
The FOMC has been doing what it takes to squash inflation. But with interest rates already deep into restrictive territory, the remaining upside to the path of interest rates will likely be limited.