The Federal Reserve’s latest Summary of Economic Projections, published Wednesday, delivered a message that was remarkably optimistic and fairly clear: Fed officials forecast that interest rates will stay above 5% through the end of next year, while unemployment will be lower and economic growth will be higher than previously expected.
Overall, the median forecasts reflected tighter monetary policy over the coming year and a more resilient economy in spite of it, as compared with a somewhat softer economy that officials envisioned in June, when they last penciled in their predictions. The latest SEP outlined what
Bank of America
economists called a “no landing” scenario: “There is essentially no price to pay in terms of growth or jobs for bringing inflation back down to target,” they wrote on Wednesday afternoon.
But that optimism and a hawkish stance on the rate-hike path were largely absent from a postmeeting press conference with Fed Chairman Jerome Powell, who focused instead on the central bank’s dependence on data and eagerness to proceed carefully as it decides whether and when to raise interest rates again.
“We’ve covered a lot of ground, and the full effects of our tightening have yet to be felt,” Powell told reporters. “Looking ahead, we’re in a position to proceed carefully in determining the extent of additional policy firming that may be appropriate.”
Throughout the press conference, Powell sought to de-emphasize the importance of the so-called dot-plot projections, which he noted were simply a collection of individual forecasts rather than an agreed-upon plan. He declined to call a soft-landing scenario his “baseline forecast.” And he acknowledged what he called a “long list” of external factors causing significant uncertainty that could serve to weaken the economy right now, ranging from the auto workers’ strike and a looming government shutdown to the resumption of student loan payments and rising oil prices.
The Fed chairman ultimately undercut the signal the dot plot sent that markets should brace for further rate hikes. “It feels like Jay Powell took the confidence out of the hawkish message from the SEP,” wrote Christian Scherrmann, U.S. economist at DWS Group.
The divide between what the dots showed and what Powell said left the broader message from the Fed somewhat muddled. Mohamed El-Erian, chief economic advisor at
Allianz
and president of Queens’ College at the University of Cambridge, worried aloud that the economic and policy signals from the press conference were coming across “as both confused and confusing.”
The stock market reaction suggested as much. Stocks dropped in reaction to the SEP release before bouncing back at the start of the press conference, only to fall again later.
The mixed messaging could have been by design, a way to keep financial conditions restrictive and drive home the fact that rates very likely might be headed “higher for longer,” without promising that another rate hike this year is set in stone.
It might also have been a reflection of how the dot-plot median forecasts are forged. Every member of the Fed’s policy committee writes down a forecast, but not all of them vote on policy. Given that the Board of Governors, who always vote, skew more dovish than the regional bank presidents, who rotate through yearlong voting stints, the dot plot could be overstating the committee’s true path forward, noted Bill Adams, chief economist for Comerica Bank.
By that logic, Adams suggests a majority of voting members see the federal funds rate falling below 5% by the end of next year, despite what the forecasts suggested.
Ultimately, Wednesday’s press conference fueled the expectation that despite the hawkish dots, Fed officials are more likely than not done with raising rates this year, absent any significant upside surprises in coming inflation data. As of Wednesday evening, markets were pricing in a 28% chance of a rate hike in November—slightly below the 29% chance investors saw a day earlier, and significantly lower than the 41% they saw a week earlier, before the Fed’s Sept. 19-20 meeting began.
The key consideration now is whether investors and markets take Powell at his word, or whether the dissonance grows.
“This is the same Fed that in 2000 told us we were just experiencing an inventory unwind, in 2007 that house prices never go down nationwide and that the problems in subprime would be contained, in 2009 that there were economic green shoots everywhere, in 2018 that we were going to have to see the funds rate go deep into restrictive terrain, in 2021 that rates were going to stay at zero for years to come and that inflation was transitory, and now in 2023 the mantra is higher for longer,” wrote David Rosenberg of Rosenberg Research.
“Sometimes, it does pay to bet against the Fed rhetoric and its forecasts,” he said. “And something tells me this is where we are today.”
Write to Megan Cassella at [email protected]
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