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Fed maintains near-term hawkish bias, telegraphs slower pivot in 2024

The Federal Reserve’s policy committee left benchmark rates at a 22-year high this afternoon, kept at least one more hike on the table, and signalled it would likely cut three times next year – not the four previously envisioned.

At the conclusion of its two-day meeting in Washington, the Federal Open Market Committee unanimously voted to maintain the target range for the federal funds rate between 5.25 and 5.50 percent – the highest since 2001, with no dissents in favour of lifting or cutting the rate.

In the statement setting out the decision, policymakers emphasized signs of resilience – pointing out the “solid pace” of economic expansion, slower, but still “strong” job gains, and low unemployment – before noting downside risks. “Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation,” they said, “The extent of these effects remains uncertain,” but the “Committee remains highly attentive to inflation risks”.

According to the accompanying “dot plot” Statement of Economic Projections, the benchmark federal funds rate is expected to end the year around 5.6 percent (indicating at least one more hike), before falling to 5.1 percent in 2024 – a level that implies just three reductions next year, down from four in the June forecast. The previous “dot plot” showed the rate hitting 5.6 percent in 2023, 4.6 percent in 2024, and 3.4 in 2025.

Under the updated forecasts, the headline personal consumption expenditure price index is seen rising 3.3 percent this year before fading to an 2.5-percent pace next year. Unemployment is expected to hit 4.1 percent by the end of 2024, down from 4.5 percent in June. Growth expectations for 2023 were revised sharply upward to 2.1 percent from the previous 1.0-percent estimate, and momentum is seen fading toward a still better-than-previously-anticipated 1.5 percent in 2024 and 1.8 in 2025.

The decision comes after a series of data releases painted a rather confusing picture of underlying forces in the economy toward the end of the summer, with price pressures and labour markets showing signs of cooling even as energy prices rose and consumer spending remained strong.

The dollar is climbing against its major rivals as Treasury yields push higher across the front end of the curve, and risk-sensitive assets – from equities to the Canadian dollar – are weakening. These directional moves are vulnerable to reversals during the press conference, when Chair Jerome Powell could struggle to reconcile underlying economic contradictions without triggering shifts in interest rate expectations – and we would note that the “dot plot” should be taken with a grain of salt. When we compare the realized interest rate path with median projections provided over the last decade, the results are fairly clear: just like the markets themselves, the Fed is almost always wrong about what the Fed will do.

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