Federal Reserve Holds Rates: Full Analysis

The
federal-funds
rate
now
stands
at
a
target
range
of
5.25%-5.50%,
following
5
percentage
points
in
hikes
implemented
from
March
2022
to
July
2023.
The
size
and
speed
of
these
raises
exceed
those
of
any
Fed
tightening
campaign
since
1980.

Powell
noted
that
the
“full
effects
of
tightening
are
yet
to
be
felt”
on
the
economy,
which
we
agree
with.
It
remains
highly
uncertain
to
what
extent
the
hikes
will
further
slow
down
the
economy,
and
how
this
will
translate
into
getting
inflation
back
down
to
the
Fed’s
2%
target.

The
tenor
of
Powell’s
remarks
in
Wednesday’s
press
conference
was
hawkish,
matching
his
speech
at
Jackson
Hole,
Wyoming,
in
August.
He
continues
to
emphasise
the
risk
of
the
Fed
insufficiently
tightening
to
bring
inflation
down
while
giving
short
shrift
to
the
risk
that
overtightening
may
push
the
economy
into
a
severe
recession.

This
accords
with
the
Fed’s
updated
economic
projections
(the
median
expectations
among
FOMC
members).
The
Fed
now
expects
the
federal-funds
rate
to
stand
at
3.9%
at
the
end
of
2025,
up
from
its
earlier
3.4%
prediction.

We
continue
to
expect
a
faster
pace
of
Fed
funds
rate
cuts
than
what
the
Fed
currently
projects,
as
we’re
anticipating
a
faster
pace
of
inflation
reduction.
We
project
fourth-quarter
2024
year-over-year
core
PCE
inflation
of
1.9%,
while
the
Fed
projects
2.6%.

Additionally,
we
project
2024
fourth-quarter
year-over-year
GDP
growth
of
1.0%,
compared
with
the
1.5%
projected
by
the
Fed.
In
our
view,
this
will
lead
the
central
bank
to
cut
aggressively
in
2024
and
2025.
We
expect
the
Fed
to
lower
the
funds
rate
to
3.50%-3.75%
by
the
end
of
2024.
That
contrasts
with
a
median
forecast
of
4.5%
from
the
Fed
and
expectations
in
the
bond
market
of
between
4.5%
and
5.0%,
as
shown
in
the CME
FedWatch
Tool.

In
addition,
we
see
the
Fed
pushing
the
funds
rate
down
to
2.00%-2.25%
by
the
end
of
2025
–
much
lower
than
the
Fed’s
expectations
of
3.75-4.00%.

We
expect
continued
supply-side
improvement
to
help
drive
inflation
down
over
the
next
year,
while
lower
GDP
growth
(and
commensurate
lower
labor
demand)
also
exerts
a
downward
influence.
Once
inflation
returns
to
about
the
Fed’s
2%
target
and
GDP
growth
begins
lagging
trend
growth
(which
is
at
least
2%),
the
Fed
will
begin
cutting
swiftly.

Downside
Risks
to
the
Economy

We’re
more
attuned
to
the
downside
risks
to
economic
activity
than
what
the
Fed
is
acknowledging.
The
real
five-year
Treasury
yield,
which
adjusts
yields
for
expected
inflation,
stands
at
about
2.2%
—
the
highest
it’s
been
since
2007,
excluding
a
brief
aberrant
spike
in
2008.
We
see
the
strain
of
high
interest
rates
as
likely
to
progressively
accumulate
throughout
the
economy.
There
is
a
possibility
of
abrupt
downward
jumps
in
financial
conditions
as
balance
sheets
at
various
entities
are
pushed
beyond
their
breaking
points.

Still,
we
expect
the
Fed
to
move
adroitly
in
2024
to
start
easing
monetary
policy
before
conditions
deteriorate
into
a
severe
recession.
Admittedly,
the
Fed’s
initial
response
to
the
inflation
spike
in
2021
and
2022
was
sluggish,
suggesting
an
inability
to
respond
to
turning
points.
But
those
were
very
unusual
circumstances.
By
contrast,
we
saw
the
Fed
move
quickly
in
2019
to
ease
monetary
policy
slightly
as
a
precautionary
measure,
despite
little
weakening
in
economic
activity
playing
out
in
the
data.

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