Fed holds rates to 525–550 bps but signals "higher for longer"
Summary
On Wednesday, September 20, 2023, the Federal Open Market Committee (FOMC) voted unanimously to hold the fed funds rate at a target range of 5.25%–5.50%. While the market widely expected this outcome, updates in the Fed’s Summary of Economic Projections (SEP) were notable. Most importantly, the Fed’s projection of interest rate policy for future years showed higher-rate expectations for next year; the median projection for the Fed Funds target rate by the end of 2024 rose to 5.10%, up from 4.60% in the prior publication one quarter ago. The median-rate expectation for end-2023 remained the same, with 12 policymakers expecting another hike while the remaining seven project no change to rates by year-end. On balance, the theme of "higher for longer" remains, while the Fed continues to navigate towards a soft landing.
Source: Federal Reserve Summary of Economic Projections
Impact on rates
Unsurprisingly, short-term interest rates moved higher following the updated Fed projections. The two-year Treasury yield hit its highest level since 2006, eclipsing highs seen in recent weeks and in March prior to the regional banking crisis. While the jump in short-term rates reflects the markets digesting the Fed’s refreshed projections, longer-term rates remained relatively flat. On the long-end, the Fed’s own projections suggest a return to "normal" rates of 2.50% will not happen until at least 2027. On the short-end, traders appear split as to whether the Fed will hike again in 2023, with roughly 50.00% of the market expecting a hike in either the Fed’s December or November policy meetings. Expected timing of initial Fed cuts continues to push out later into the future, currently projected for July in the forward curve.
Moving forward
Looking ahead, uncertainty prevails as the strong economic projections come amid looming concerns in the economy. Specifically, the Fed’s projection of 2023 GDP growth increased to 2.10% from 1.00% previously. Prior figures implied a likely recession this year, while the current projection eliminates a recession for this year. The Fed also lowered its view of unemployment.
While these positive themes were evident in the SEP, market participants must grapple with the ongoing United Auto Workers (UAW) strike, a potential government shutdown, and the resumption of student loan payments — all of which could weigh on consumer spending and sentiment.
Economic and market update
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