The seventh Federal Open Market Committee (FOMC) meeting of 2023 is upon us, and it promises to be a pivotal event for both financial markets and your finances. What can we expect from the meeting and what are the potential implications.
First, it’s anticipated that the Fed will maintain its target rate for Fed Funds, leaving it unchanged at 5.50%. This decision aligns with their choice at the July 26, 2023 meeting. The upcoming meeting won’t include an updated Statement of Economic Projections (SEP), known as the “dots.” The next set of projections is expected to be released on December 13. This means the Fed’s decision is based on the same economic data available to everyone, without the benefit of their in-depth projections. Following the meeting, Fed Chair Jay Powell will hold a press conference.
The Fed might indicate that the rate hike cycle initiated in March 2022 has concluded, signifying the terminal rate. This is the rate at which inflation should naturally decrease without further rate hikes. While the Fed may retain some flexibility, they don’t anticipate needing to take further action unless inflation worsens.
However, there are concerns with this policy stance:
1. Inflation’s Persistence: The Fed’s fight against inflation isn’t necessarily over. Recent Consumer Price Index (CPI) data shows inflation has cooled since its peak of 9.1% in June 2022. Still, the latest CPI numbers are cause for concern, with annualized rates at 3.7% for September. Core PCE, the Fed’s preferred inflation measure, isn’t faring much better. These figures don’t account for food and fuel, which are significant components of everyday expenses.
2. Inflation and Recession: Assuming that a mild recession will naturally reduce inflation is a risky bet. History has shown that inflation and recession can coexist, as seen during the late 1970s and early 1980s.
3. Relying on Long-Term Rates: The Fed’s reliance on long-term rates to curb inflation is problematic. The concept of a “term premium” is questionable and may not be a reliable tool for controlling inflation. High long-term rates may not necessarily achieve the desired outcome, and they could be influenced by various factors beyond the Fed’s control.
In summary, the FOMC meeting brings both hope and uncertainty. The Fed’s belief in the ability of long-term rates to manage inflation and the assumption that recession will naturally tame it are risky propositions.
Sven Franssen