TLT - Tighter For Longer - The September FOMC
2023-09-22 14:30:00 ET
Summary
- Incoming data convinced the Committee that rates would stay higher for longer, through 2025.
- The price data, in particular, combined with information on aggregate CPI and PCE, suggests that prices are still increasing, albeit at a slower pace.
- The SEPs reveal significant changes in the Committee’s view of the path for an economy that is stronger but is experiencing a longer delay in reflecting previous policy moves.
By Robert Eisenbeis, Ph.D.
Although the FOMC held rates constant at its September meeting, incoming data in the form of inflation, stronger labor markets, and the Beige Book convinced the Committee, as reflected in its Summary of Economic Projections (SEPs), that rates would stay higher for longer, through 2025.
At this meeting, the FOMC didn't have aggregate GDP data for the third quarter, so it had to rely upon secondary sources. The Beige Book summary of aggregate activity as well as key segments, shown below, indicated that seven districts showed an increase in growth, some easing of prices, increases in labor markets, mixed consumer spending, and a decline in residential real estate. The price data, in particular, combined with information on aggregate CPI and PCE, suggests that prices are still increasing, albeit at a slower pace. Against this backdrop, the SEPs this time provide some very useful insights into the FOMC's view on policy and the economy.
The SEPs reveal significant changes in the Committee's view of the path for an economy that is stronger but is experiencing a longer delay in reflecting previous policy moves. The most striking numbers are the 1.1% percentage point increase in GDP growth for 2023, followed by a 0.4 percentage point increase for 2024, above the levels previously expected. Similarly, the outlook for the jobs market is also stronger, with projected unemployment for 2023 reduced from 4.1% to 3.8% and from 4.5% to 4.1% in both 2024 and 2025, while inflation holds steady. It is curious what the underlying inflation dynamic is assumed to be in these forecasts, in the face of a stronger economy. One possibility is that the Committee is assuming that past rate moves have yet to have their full impact on realized inflation, a point that Chairman Powell made at the post-meeting press conference. The main conclusion from these forecasts is that rates are expected to remain higher for longer than was expected at the June FOMC meeting.
Much has been made in the press of the Committee's hawkish pause after the meeting, based upon the so-called dot chart, which revealed that, despite the pause, 12 participants expected one more rate move later in the year, as compared with 7 who thought the current rates would remain through 2023. Rate decreases, if they occur at all, now first appear in 2024. This issue received considerable attention at the post-meeting press conference, as did the prospect for a soft landing. Chairman Powell indicated that a soft landing was both a real possibility and a goal in the process of trying to bring inflation down without causing significant unemployment - the Committee's two statutory mandates. The Committee felt that it could afford to wait to see whether it had achieved the necessary degree of tightness to achieve its goals, especially given the lags in policy and the view that the full effect of past rate hikes was yet to be felt. Those factors, combined with the continued strength in GDP and labor markets, meant that it was most likely, in the Committee's view and as reflected in the SEPs, that rates would remain higher for longer than was previously forecast without posing undue risks to a soft landing.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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Tighter For Longer - The September FOMC