Investing Pioneer – 5:17 PM EST – 12/14/2022
The Federal Reserve commenced its FOMC meeting today. Fed chairman Powell spoke at 2:30 PM EST, discussing the path forward. The day also saw the announcement of the 50 basis point rate hike, a consensus leading up to the meeting that was shared by 100% (85/85) of economists in a poll.
Powell said the full effects of the rate hikes are yet to be felt (lagging). Considering this, they will slow down the rate of hikes to diminish the risk of over-tightening.
He also noted they are still continuing the process of reducing their balance sheet and noted the historical records caution loosening conditions too soon.
In response to a question posed by a journalist on the subject of short-term rallies and how that impacts the Federal Reserves’ decision-making, Powell stated short-term fluctuations are not a key consideration, but instead they look at the persistent broader trends. On the topic of stock market liquidity and Federal Reserve intervention: here.
Powell remarked the best assessment given current data is a peak FFR of 5% or slightly higher.
Accompanying today’s FOMC was the Summary of Economic Projections, the totality of the estimates by FOMC participants for rate hikes, and key economic indicators for the future. The expectations cover (real) GDP change, unemployment rates, PCE inflation, Core PCE, and FFR projections.
Since June, the trend in expectations has been gloomier for the economy, with more entrenched inflation and higher rates needed. However, beyond the 2024 timeline, FOMC members consistently expect the economy to be stabilized.
Let’s review the data to see how their thinking has evolved over the last several months, starting with GDP expectations. (Note, all the following data is based on the median of the projections.)
Real GDP Expectations
Since June, for 2023, projections have been significantly adjusted downwards twice. The negative change is less pronounced for 2024, and 2025 remains stable, reflecting a comparative uncertainty/volatility in short term expectations?
Unemployment Rate Expectations
In June, it was estimated unemployment rates would peak at approximately 4%. Recently, that has been adjusted approximately 50 basis points upwards.
PCE Inflation Expectations
Still, the Federal Reserve expects the 2% target can be obtained by 2025, though the median has risen by 0.1% (to 2.1%).
Core PCE Expectations
Core PCE projections for 2023 have risen higher than regular PCE inflation since June, though they converge again for 2024 and beyond.
Federal Funds Rate (FFR) Projections
Raising 2023 projections from under 4% in June to closer to 5% in September, recent projections continue the same trend in increased projections, with a median estimate over 5%.