Tomorrow is the commencement of a two-day FOMC meeting. It is widely expected the Committee will keep rates steady in the 5.25% to 5.5% range and might “pencil” in one more interest hike later this year and stay at the peak level for longer than previously expected.
Fed Chair Powell signaled plans to pause hikes this month, slowing the tightening campaign, approaching a peak in rates even as the rate of inflation remains too high. Central bankers are prepared to tighten more if necessary.
The continuing strength of the economy has surprised all including the Federal Reserve. A robust economy is shaping the September meeting discussion. The median committee member is likely to see economic growth this year at 2%, double the 1% forecast in June and compared with 0.4% seen in March.
In addition, the Committee is likely to forecast a stronger labor market with unemployment rate now 3.8%, edging 0.1% higher to 3.9% by year end, lower than the 4.1% rate seen in June and 4.5% in March.
The forecasts are expected to include the Committee’s first look at 2026, when the median policymaker is likely to see rates at 2.6% by the end of that year, slightly above the long-term rate, which is estimated at 2.5%.
Finally in its forecasts, the FOMC is likely to continue to see the inflation rate as being elevated, with a year-end projection of 3.2%. The outlook for underlying core inflation, excluding food and energy, may be slightly improved to 3.8%. The 2.0% inflationary speed limit is not projected to be achieved until mid-late 2026.
How accurate is this forecast? As stated, at the beginning of the year most economists, including the Federal Reserve, had expected the economy to be near or in a recession by this time. However, third quarter growth may be the greatest since 2003 [ex COVID distortions].
For what it is worth department, economists polled by Bloomberg believe the first-rate cut will occur in May—two months later than the view held in July.
Commenting on Friday’s market activity, equities declined, perhaps the result of triple witching hour which may have skewed the averages via several large trades. The VIX or the fear gauge, climbed from the lowest level since January 2020.
Treasuries were relatively quiet, exhibiting little change. The economic calendar is relatively light comprised of several housing statistics and a sentiment survey.
Last night the foreign markets were mixed. London was down 0.33%, Paris down 0.97% and Frankfurt down 0.54%. China was up 0.26%, Japan up 1.10% and Hang Seng down 1.39%.
Futures are flat. How will the auto strike impact inflationary expectations? Many have acknowledged the demands are unreasonable, however it is generally recognized the strikers do have the upper hand given record low unemployment [perhaps the result of an anemic labor participation rate and fiscal policy that facilitates such an environment]. Will other unions make similar demand which would then further complicate Fed policy? The 10-year is off 2/32 to yield 4.35%.
