Fed holds rates to 525–550 bps but signals "higher for longer"
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.
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.
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.
Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit chathamfinancial.com/legal-notices.
Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions. All rights reserved.23-0228
Our featured insights
Expert Conversation with Matt Henry and Rob Kaplan
Matt Henry, Chatham's Managing Partner and CEO, and Rob Kaplan, former President and CEO of the Federal Reserve Bank of Dallas, discuss the economy, alternative capital sources, interest rates, and more.
BoE holds rates steady again while ECB pauses record run of hikes
The Bank of England (BoE) kept rates on hold at 5.25% for a second consecutive meeting today, as it attempts to balance a weakening economy with inflation that is still measuring three times its target. The Bank's updated forecasts show medium-term inflation slightly higher than in August's...
Fed holds rates steady while noting tighter financial conditions
On Wednesday, November 1, 2023, the Federal Open Market Committee (FOMC) voted unanimously to hold the fed funds rate at a target range of 5.25%–5.50%. Today's pause represents consecutive FOMC meetings with no rate change, having hiked in 11 out of the last 14 prior meetings. The most notable...
ECB hikes 25 bps while BoE keeps rates steady
The Bank of England (BoE) announced it would keep rates on hold at today's meeting, following 14 consecutive rate hikes that have taken borrowing costs to 5.25%, the highest level since 2007. A 25-basis-point rate hike was expected at the start of the week, but the release of August inflation...
BoE hikes 25 bps and warns more to come, while ECB cools on a September hike
The Bank of England (BoE) raised borrowing costs by 25 basis points at their meeting today, a smaller hike than their June meeting following better-than-expected data. However, two policymakers voted for a 50-basis-point increase. The BoE's statement warned that some of the upside inflation risks...
FOMC increases rates by 25 bps to 525–550 bps range, reflecting 22-year high
On Wednesday, July 26, 2023, the Federal Open Market Committee (FOMC) voted unanimously to raise the fed funds rate to a target range of 5.25%–5.50%. Following a pause in rate hikes at the prior meeting, this increase elevates the fed funds target to its highest level since 2001 and was...
ECB holds course but BoE in trouble
The European Central Bank (ECB) continued its path of rate rises at the latest meeting, surprising no one with a hike of 25 basis points taking its deposit rate to 3.50%, the highest level in 22 years. The Governing Council is making every effort to reduce inflation to their 2.00% target after...
Fed holds rates: Powell pauses
On Wednesday, June 14, 2023, the Federal Open Market Committee (FOMC) voted unanimously to hold the fed funds rate at a target range of 5.00% - 5.25%. The FOMC statement continued to reference economic expansion and a robust labor market. In a departure from the last statement, the FOMC cited...