Name: The Latest FOMC Meeting Focuses on Solid Economic Growth, Strong Jobs
Uploaded: 2023-09-20T20:55:00Z
Duration: 14 min 16 s
Description: The Fed released its summary of economic projections at the latest FOMC meeting. What does it say about the current state of the economy and what will policymakers do next? Photo: Al Drago/Bloomberg News

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The Fed released its summary of economic projections at the latest FOMC meeting. What does it say about the current state of the economy and what will policymakers do next? Photo: Al Drago/Bloomberg News

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The Latest FOMC Meeting Focuses on Solid Economic Growth, Strong Jobs

Welcome, welcome, welcome into "Market Takes" on one of the best days of the year, one of the eight best days of the year, it is Fed Day. We are breaking down the Federal Reserve's September meeting, talking about what they said, what they didn't say, talking about the statement. We got a summary of economic projections. Y'all down with SEP? You know me. Listen, we're gonna be getting into all that right here on "Market Takes." Of course, we're gonna talk about the Fed statement and all of those things. We're gonna break down the chairman's press conference. Let's get into what we're gonna be talking about. We are going to be talking about, like I said, that statement, the biggest takeaways from Fed Chair Powell's press conference. Of course, we're gonna be getting into the market reaction showing you how stocks, bonds, currencies, and across the markets, how they responded to what we heard, and what we saw from the Federal Reserve today. And we're gonna be talking about how the Fed sees the economy based on what we got in this statement and the summary of economic projections, the Dot Plot, and all that good stuff. Because every so often, four times a year, the Fed gives us a little extra in its statement that really helps us break down and understand how they're looking at the future, so we'll talk about that. Talk about the current state of the Fed and what to watch next, so all of those things. We're gonna go a little bit long here on "Market Takes." So I hope you're strapped in, and we are gonna get into it right now. So first of all, let's talk about that Fed statement, right? What changed from July's meeting to this meeting in September? Not a whole lot actually. BMO rates analysts describing it as "effectively unchanged." Rates are still at the highest in 22 years. And actually let's throw up here on your screen a chart of where we are in terms of the Fed funds rate. So what you're looking at right there is how the Fed funds rate has moved, going back to the year 2000. And as you see, like I said, we are at the highest rates right now that we've seen in 22 years. Rates were not changed at this meeting, but they were raised in July, so we are still sitting at that higher level. The big theme, the big takeaway from this meeting was higher for longer. And so there have been some expectations that we were gonna get to these high levels we're at right now and then come right back down. In terms of what the Federal Reserve is predicting, in terms of what Fed Chair Jay Powell told us today, that's not gonna be the case. At least that's not the case the Fed has priced in. And this chart here just illustrating how far we've come from when rates were very high in 2000, went back down, were low for a long time, another higher, and the Fed predicts they're going to stay high for a while. In terms of the statement, really some pretty minimal things. The only differences were in the first graph of the report, changing job growth or economic activity had been expanding at a moderate pace, now a solid pace. Job gains have slowed instead of been robust in recent months. But then the Fed added "but remain strong." So job gains have slowed but remain strong. Those are the only two real statements. Goldman Sachs describing it as "The release was more hawkish than expected." We'll get into all that. Most of that was was in the Dot Plots. But in terms of the statement, in terms of what they said, what they said, the changes they made, pretty minimal, nothing big that jumped out at me, and certainly nothing big that jumped out at anybody 'cause there were very few changes to the statement. Here's why those changes matter, and economists can argue about solid versus moderate, whatever. That seems like an, obviously all the changes that the Fed makes to its statement are intentional, but we will see just what those changes mean. I think we get a little bit more context from Fed Chair Jerome Powell, the press conference. But I think the Fed really acknowledging that the labor market is slowing down, putting that "but remain strong" in there. It kind of knocks that a little bit, but really knowing that the labor market is strong, the Fed's saying, okay, things are slowing down. This labor market that had been very hot for a while is starting to cool down. So just they like what they're seeing from the job market with unemployment rising, job openings declining, getting closer to one another. Again, job openings have been very high, unemployment has been very low. Those are coming more into concert with one another. You still have about one and a half or more than one and a half job openings for every unemployed person here in the United States. But those numbers, again, getting back close to each other that's what the Fed wants. And I think that was really the biggest takeaway you could take from the statement, not a whole lot. And again, it was interesting that there was very little change in the statement given that in July they raised rates and in September they did not raise rates. Usually there's a justification. They say, okay, here's why we raised rates in July. We saw this, this, this, and this. And then when they don't raise rates they say, okay, we didn't raise rates because of this, this, this. These statements were pretty much the same. I noted the same thing in July when they raised rates. There wasn't a big change from what rates had previously been in June when they chose not to raise rates. Now let's talk about the Dot Plot. Wanna put a chart up here on your screen so you can see just what the Federal Reserve is predicting and projecting for the next few years. Now the first thing you'll notice is that in 2023 this is where the Fed expects rates to be at the end of the year. So right now rates are between 5.25 and 5.5%. The Federal Reserve policymakers, 12 of them are expecting to raise rates one more time this year. Seven are predicting that rates will not rise. So where you see those seven dots on the left side of your screen, that's Federal Reserve officials saying we've done enough, we've raised policy enough, we don't need to raise interest rates anymore. And then there's 12 more folks in the committee who are saying, yes we do. We need at least one more increase. There's only two more meetings left this year. There's one in November, one in December, and you've got more than half of the committee saying we need to raise rates again. Another interesting thing about the Dot Plot is what you're seeing in 2024. So by the end of next year, a declining, a smaller number of officials see rates being cut down. If you looked at this back in July or back in June, excuse me, there were a number of Fed officials who expected rates to be below 4.5% by the end of next year meaning that they would cut rates at least three times. You had a couple folks expecting even more than that. What you're seeing now on your screen there is expectations for only a couple more. There's only two officials who expect rates to be below that 4.5% mark. Everyone else expects that the Fed will cut two times or not cut rates at all from where they are. You've even got one official predicting that rates will actually increase by the end of next year. That is a very big difference from what we saw in July and that really I think illustrates the change that we've seen in terms of expectations for the outlook and that's what it's all about. Again, the big term or the big theme from this meeting here in September was higher for longer, not necessarily we're gonna raise rates a bunch but rates are gonna stay higher for longer and that's what the Fed is trying to really beat home in terms of what they're saying through their guidance and what we got in this Dot Plot, that is a really big change and economists have been talking about this for a while. That higher for longer, it doesn't really matter at this point because rates are above 5%. That's restrictive. That's slowing the economy down. It doesn't matter if they raise rates again one time, a couple times, what really matters is that they don't plan to cut them and the market had been predicting the Fed was gonna cut rates. The market has long been saying, "Hey, the Fed can't hold rates here for very long. They're gonna have to cut." Well we're seeing now, the Fed saying, "Nope, not only are we not gonna cut, we are gonna hold higher for longer." And that's what you're seeing there on the Dot Plot. And again, the market's still disagreeing with the Fed. If you look at Fed funds futures, the market still predicts that we're gonna get at least three rate cuts before the end of the year next year. The Fed predicting two at most and a lot of folks really predicting there's gonna be one or in some folks even saying no rate cuts next year. So it'll be interesting to see how the market responds to that. Remember when we got into the middle part of this year that's when we really saw a lot of those expectations for Fed rate cuts, that was expected to happen this year. It has not happened and it doesn't look like it's going to happen. And that's what caused a lot of the wobbling we saw in the stock market and a lot of the higher bond yields that we've seen over the last few months is the market getting used to and accepting that the Fed is not going to cut rates as they thought they would. So when you're seeing this big decline in tech stocks, when you're seeing bond yields rise to the highest in 16, 17 years that has to do with these market expectations for rate cuts by the Federal Reserve really being wiped out and the market reassessing and saying, okay, the Fed's gonna keep rates high, Fed coming in and saying today we are gonna keep rates high and the market is gonna have to react to that and we are seeing some market reaction already. We're gonna get to that in just a minute. Let's talk really quickly about the Summary of Economic Projections. Now the SEP is where the Fed says, okay, this is what we think the economy is gonna look like over the next year or so. What was really fascinating was for the end of 2023 you've got the Fed raising its GDP forecast significantly. We can't gloss over this. The Fed raised its GDP forecast to 2.1%. So they think the US economy is gonna grow 2.1% this year for 2023. Now here's why that's significant. In June, that's three months ago, the SEP said that they expected the US economy to grow 1% in 2023. In March, there were expectations for 0.4% growth for the entire year. So the Fed has basically quintupled its rate expectations, more than quintupled actually. So more than 5x what they predicted as recently as March. That is a huge increase in terms of US growth and that means they're expecting not just a soft landing but really for the US to grow about trend, for this to be a solid growth year for the economy. And it's hard to square that with inflation coming down as much as they predict it'll be, they also lowered their inflation expectations for the rest of the year. That's a big deal. Lower the projections for unemployment, lower expected inflation level, and lowering their projections for core inflation as in even when we kick out in food and gas prices and those energy prices, even when we kick that out, we think inflation's gonna be lower than we initially projected only a few months ago. Basically, the Fed is predicting that not only will they get the soft landing but they're also going to get US economic growth coming in solidly way higher than expected. So inflation is going to decline, unemployment is gonna stay low, and we're gonna get solid US growth. Listen, that would be very bullish, very strong for the economy. It's not a recipe that you usually can put together. You need an expert chef to put together all those things. Lower unemployment, lower inflation, and higher growth. The Fed is predicting a really nice cake, a really nice souffle I might even say, and we'll see if they get it. I think really the biggest takeaway from the Press Conference was Fed Chair Jerome Powell read you a quote. "We have the ability to move carefully and that's what we intend to do." The Fed is feeling pretty good right now. They're feeling like, okay, data's in the place that we want it. Fed Chair Jerome Powell didn't seem pressed, he didn't seem like he was anxious, he didn't seem like he had to make a move. He says, "Okay, things are looking all right. We're seeing what we wanna see from the data on the job side, on the inflation side, all these market metrics that we watch, things are looking the way we want them to look." I think that was the biggest takeaway from the presser because unemployment has not risen significantly, has not risen significantly. Inflation has come down. It is giving the Fed the moment to kind of breathe, to sit back and say, "Okay, we don't have to move too fast. We don't have to take any decisive action now. We can chill." The other takeaway I think from this presser was Fed Chair Powell really acknowledging the differences and the differing opinions on the FOMC. You had 12 officials saying they expect one more rate hike this year, rates to go up. And then you had seven saying they don't expect for rates to go back up. Market is not expecting for there to be another rate hike this year.

So we'll see how we square that. You've got a lot of new folks on the Fed, we're gonna talk about that in just a moment. But a lot of, there was some acknowledgement by Fed Chair Powell today that, listen, we don't have a consensus. There's not an overwhelming overpowering view that we need to raise rates or lower rates, that we've done enough or we need to do more. All of that is going to be decided and it's gonna depend on the data. And so the data is really gonna move markets, especially if we get prints that are above expectations, especially on the inflation side. I think when you combine the Press Conference and the statement, the big picture was just the Fed feels comfortable with higher for longer and that is going to move markets. I think in the coming days. I think the biggest surprise about the Press Conference was really how Fed Chair Powell characterized the data being so okay with inflation. CPI inflation was at 3.7%. That's moving away from the Fed's 2% target and it was the second month in a row that inflation has risen overall. Fed being comfortable with jobs numbers coming in at 100,000 over the past few months, that just is enough to keep us in line for population growth. You need to add 100,000 jobs each month just to keep up with new people coming into the population, people being born, people turning 16, 18, going out and getting those jobs. So really Powell, when he was pressed about some of these things, some of the weaker data, he kind of demurred a bit, said the Fed tends to look through volatility in those oil prices and things like that, really downplayed some of the bad readings. So some of those numbers that suggest that inflation could be picking back up. So that was really interesting. Before we get out of here, want to plug my new podcast "WSJ's Take On the Week" for more on what may move the markets, check it out. "WSJ's Take On the Week." We cut through the noise to explain the major business and financial news that may move markets all so you can make smarter investing decisions. You can subscribe wherever you get your podcasts, that's Spotify, Apple Podcasts, Stitcher. If you just want to go on wsj.com, we got it there too. Check it out, "WSJ's Take On the Week." I'll be talking to you there, that comes out every Sunday 6:00 AM. You can set your alarm to it. Hope you'll check me out there as well. Listen, that's gonna do it for us here on "Market Takes." I am Dion Rabouin, reporter at The Wall Street Journal. Thanks so much for joining us here on "Market Takes" and we will see you when we do it again next time.