December 13th FOMC Follow-Up

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  • The FOMC announced that it will again leave the Federal Funds target rate unchanged at a range of 5.25 – 5.50%. This was a unanimous decision by the Committee and was anticipated by the market. This is now the third consecutive meeting at which the Fed has kept rates unchanged.
  • In September, the Fed had communicated a dot plot which suggested some probability of an additional rate hike yet in 2023, so this decision brings the Fed back in line with recent market expectations for the year.
  • Looking forward, the Committee’s views on the appropriate path of monetary policy have shifted toward favoring an additional 25 basis point rate cut in 2024, beyond the 50 basis points in cuts that had already been communicated. Despite this, the Fed continues to project higher 2024 rates than market participants. The revised dot plot suggests Fed members now expect the Federal Funds target rate to decline to a median value of 4.6% by the end of 2024.
  • This decision to not hike, combined with the updated dot plot, essentially gives the market 50 bps in extra cuts compared with what was previously communicated by the Committee’s September dot plot.
  • Market reaction was strongly positive, with the S&P 500 ending the day up 1.37% and the yield on the 10-year US Treasury falling to 4.03%. Markets are now pricing in more than 100 basis points in rate cuts by next September.

Economic Projections

  • The Fed’s updated Summary of Economic Projections contained very limited revisions to GDP, unemployment, and inflation expectations.
  • FOMC members revised 2024 GDP expectations down from 1.5% to 1.4%, while increasing the 2026 expectation from 1.8% to 1.9%. The unemployment rate projection remained at 4.1% for 2024 and 2025, and increased from 4.0% to 4.1% for the 2026 and longer run projections.
  • Core and headline PCE inflation expectations were revised down modestly for 2024 and 2025. Core PCE inflation was revised down from 2.6% to 2.4% for 2024 and from 2.3% to 2.2%. There were no changes to the 2026 and longer run inflation expectations.

The FOMC is next scheduled to meet January 30-31, 2024.


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