As widely expected, the FOMC voted unanimously to leave the overnight rate unchanged in a target range of 5.25%-5.50%, a 22 year high. The “dot plot” or the median estimate of each FOMC member foresees one more hike this year.
The dot plot is now suggesting the overnight funds rate will be reduced to 5.1% by the end of 2024, up from 4.6% when projections were last updated in June. They see the rate falling thereafter to 3.9% by the end of 2025 and 2.9% at the end of 2024.
Officials now project inflation would fall below 3% next year and see it returning to 2% in 2026. They expect economic growth to slow in 2024 to 1.50% after an upwardly revised 2.1% pace in 2023. In June the Committee has expected a 1.0% 2023 growth rate.
The higher for longer projection for interest rates in parts reflects a more sanguine view on the path for unemployment. Policymakers now see the jobless rate rising to 4.1% in 2024, compared with 4.5% in the June projection round.
The “hawkish hold” was largely expected but all must remember that everything stated is a forecast not a promise. All forecasts and decisions will be based upon the data, data that has largely exceeded forecasts and expectations.
The immediate reaction to the outcome was a rise in the two-year Treasury yields to 5.17%, the highest level since 2006, perhaps the result of the significant upgrade to 2023 growth projections and monetary policy expectations.
Equites were initially unmoved by the outcome of the meeting, however, selling commenced late in the afternoon sending the tech heavy NASDAQ down about 1.50%. The Dow was essentially unchanged.
What will happen today?
Last night the foreign markets were down. London was down 0.17%, Paris down 1.42% and Frankfurt down 1.12%. China was down 0.77%, Japan down 1.37% and Hang Seng down 1.29%.
Dow and NASDAQ futures are down 0.4% and 1%, respectively, on the realization that inflation will not subside to 2% in the intermediate future and interest rates will remain “higher for longer,” perhaps suggesting a repricing of longer dated debt to reflect the new reality. The 10-year is off 6/32 to yield 4.43%.
