Fed elects to skip rate hike at September 2023 FOMC meeting

For the second time in four months, the central bank decided to not increase interest rates but indicated another hike in 2023 is likely.

• The Federal Reserve (Fed) elected to skip raising the federal funds rate at the September 2023 Federal Open Market Committee (FOMC) meeting.
• One more rate hike in 2023 is likely, either at the October/November or December meeting.
• It is the second skip in four months by the Fed, which ended its run of 10 consecutive interest rate hikes dating back to March 2022 in June.
• The federal funds rate remains 5.25%-5.50% and the Fed's cumulative total increase holds at 525 bps since March 2022, with a total increase of 100 bps occurring in 2023.
• Fed Chair Jerome Powell reaffirmed that the central bank is strongly committed to bringing inflation down to its 2% target.

Aligning with market expectations, the Fed elected to skip raising the federal funds rate at its September 20, 2023, FOMC meeting, which keeps the federal funds rate at 5.25%-5.50% – the highest range in over 22 years.

It is the second time in four months the central bank has skipped raising interest rates after a 10-meeting stretch of rate hikes dating back to the onset of the tightening cycle in March 2022. The Fed’s cumulative total increase remains at 525 bps, with a total increase of 100 bps occurring in 2023.

The median federal funds rate in the Summary of Economic Projections (SEP) and dot plot still estimates that Fed officials are expected to increase the federal funds rate once more before the end of the year. Furthermore, the Fed median federal funds rate for 2024 went from an estimate of 4.6% in June to 5.1% for this new dot plot while the median for 2025 went from an estimate of 3.4% – 3.9%.

“The new projections show a still very hawkish Fed as they took away two rate decreases that had been in place during the release of the June SEP and corresponding dot plot,” said Raymond James Chief Economist Eugenio Alemán. “This is a clear signal to markets that it is committed, at least for now, to keeping interest rates higher for longer, as it has continued to convey in every meeting since it started to increase interest rates in this cycle.”

The new SEP forecast also showed that high interest rates are not expected to bring the economy into a recession next year, meaning that the Fed is now expecting a soft landing. No longer having a recession in its SEP forecast is consistent with the Fed’s mantra of higher interest rates for longer as it doesn’t see its 2% inflation target being achieved until 2026.

The Fed’s Q4 2023 year-over-year projection for GDP increased from 1.0% during its June SEP to 2.1% for its latest SEP. Meanwhile, headline PCE inflation was upped from a Q4 year-over-year rate of 3.2% in June to a rate of 3.3% in September while the core PCE inflation was lowered to 3.7% in the September SEP compared to a rate of 3.9% in June.

“This decision and expectations going forward are not going to give certainty to markets while, at the same time, the Fed is trying to continue to prevent markets from starting to price in lower interest rates in the near term,” said Alemán. “The fact that it is no longer forecasting a recession will help support its view of higher rates for longer.”

All expressions of opinion reflect the judgment of the Raymond James Chief Economist and are subject to change.

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