Evening Brief – 09.21.23
Saying the Quiet Part Out Loud
Policymakers at the Federal Reserve plan to keep interest rates high(er) for an extended period of time.
According to the central bank’s dot-plot predictions, one more 25-basis-point rate hike this year to a range of 5.50% to 5.75% is still on the table. Meanwhile, the Fed funds rate was raised by 50 basis points for both 2024 and 2025, implying two 25-basis-point cuts in rates in 2024 rather than four in 2025 and four in 2026.
As we evaluate the Fed meeting, keep in mind that this method is consistent with the central bank’s goal to bring inflation in the US economy under control. After years of manipulating the cost of money to 0%, the Fed has been forced to reverse course.
The spike in interest rates from 0% to 5.25% occurred at an unprecedented rate, but the anticipated harm to GDP and job growth never manifested. The economy is still expanding, and unemployment is less than 4%.
“We want to see convincing evidence really that we have reached the appropriate level, and we’re seeing progress, and we welcome that. But we need to see more progress before we’ll be willing to reach that conclusion,” noted Fed Chair Jerome Powell in the post-meeting press conference on Wednesday.
The issue is that the Fed has been destroying demand for nearly two years, and the press conference showed a long-term commitment to keeping rates elevated. The question now is how policymakers will proceed in the subsequent months.
The central bank gave itself enough wiggle room to justify its hawkish stance as long as the economy follows the script. But the real test will come when the plot changes.
With the policy rate very likely at 5.5% in November; a 2-year Treasury yield firmly above 5% – a level not seen since April 2007 -; a 10-year Treasury yield fast-approaching 4.50% – a level not seen since October 2007; and rapidly rising real yields, implies a deeper yield curve inversion and potentially unforeseen negative consequences.
As a reminder: The national debt was ‘only’ $5.6 trillion the last time interest rates were trading at current levels. Today, the national debt exceeds $33 trillion, and the federal government is running massive deficits month after month.