The materials released after yesterday’s FOMC meeting included updated economic forecasts and dot plots – FOMC members' estimates of the fed funds rate over the next few years and in the longer run. While the median FOMC member downgraded their outlook for core inflation this year, the growth outlook was revised significantly higher, from the 1.0% forecast in June to 2.1% forecast yesterday. This is partly simply a function of the fact that more data has been released since the June meeting, so FOMC members are only forecasting for three or four months ahead instead of six or seven. At the same time, the unemployment rate is expected to remain lower than previously forecast, the growth forecast for next year was revised up a little while unemployment forecasts for 2024 and 2025 were revised lower. A summary of the updated forecasts is shown in Table 1 together with the forecasts from the June FOMC meeting.
Investment Insights • MFN
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FOMC September Meeting
Yesterday’s Federal Open Market Committee (FOMC) meeting saw the Federal Reserve stay on hold, as had been widely anticipated. However, the hawkish tone in the post-FOMC meeting press conference was a surprise, as were changes to the Fed’s outlook over the next few years. In this Macro Flash Note, Daniel Murray reviews the meeting and the associated projection materials. One interesting observation is that there is a widening gap starting to emerge between the median and average forecast for the longer run fed funds rate.
Table 1. Federal Reserve Summary of Economic Projections
Source: Federal Reserve and EFG calculations. Data as of 20 September 2023.
The last two rows of the table show the median FOMC member’s forecasts of the fed funds rate over the next few years and in the longer run. The median member is expecting one further rate hike this year, unchanged from the June meeting. However, an upward revision of 0.5% was made to the median forecast fed funds rate next year and also in 2025, implying a more hawkish outlook. The range of FOMC members' forecasts for the fed funds rate is shown in Chart 1, which is a recreation of the well-known dot plot chart.
Chart 1. The Fed’s dot plot and market rate expectations
Source: Federal Reserve and EFG calculations. Data as of 20 September 2023.
Whilst there is a strong consensus regarding the fed funds rate this year, there is great uncertainty regarding the future, reflected in the wide range of dots for subsequent calendar years. This is unsurprising since the forecast fed funds rate will depend on each individual member’s views on the evolution of the economy. The chart includes a line showing the current median forecasts (light blue line) and also the median forecasts for each of the three prior Summary of Economic Projections, which are released after alternate FOMC meetings. It is clear the Fed has become steadily more hawkish as the year has progressed, reflecting core inflation that has remained stubbornly high and ongoing tight labour markets. It is also notable that the futures market (orange line) is more hawkish than the Fed regarding the rates outlook for 2025 and 2026.
The longer term median forecast fed funds rate was unchanged at 2.5%. However, the average fed funds forecast has increased gently over the past 18 months and has been above the median in each of the last three Summary of Economic Projections. This is shown in Chart 2. If this continues then at some point we should expect the longer run median projection to be revised higher. This is important because it has implications for the pricing of longer dated government bonds.
Chart 2. Average and median fed funds forecasts
Source: Federal Reserve and EFG calculations. Data as of 20 September 2023.
In summary, yesterday’s FOMC meeting was a little more hawkish than expected reflecting robust economic conditions. It is not surprising in this context that the Fed delivered a more hawkish outlook. Treasury yields rose, the US dollar rallied and equities sold off as markets digested this new information. While the more hawkish tone was a negative shock for markets, on balance a more robust economic environment is something that is generally more favourable for risky assets.
In the post-FOMC press conference, FOMC Chair Powell stressed that future decisions will be data dependent. The particular focus will remain on the labour market and core inflation. Until both show some signs of softening, the Fed is likely to continue to talk tough. Two metrics that we will be watching closely in this context are the weekly initial jobless claims and so-called super-core measures of inflation i.e. core services ex housing, something that Powell highlighted in his recent Jackson Hole speech as a key measure.