Interest Rates Unchanged, But “Higher For Longer” Is the New Narrative
September 25, 2023
By Samuel Richter
Senior Securities Analyst
The Federal Open Market Committee (FOMC) held rates steady at its meeting last week. The committee maintained the federal funds rate range between 5.25% and 5.5%, which is still a 22-year high. This is the second meeting this year the Federal Reserve decided to pause.
Will the Fed follow the same sequence as the last pause or is this the high point for rates? Either way, the FOMC has made it clear it will keep rates higher for longer.
Rate Hikes – Skip, Pause, or Finished?
The last time the FOMC chose a “pause” was at the June meeting, before continuing the hiking cycle in July. The reason the Fed chose to pause is it takes time to see the effects of rate hikes on economic activity. The full extent of the elevated rates has not yet been felt, according to Federal Reserve Chairman Jerome Powell. Will this be a single-meeting skip like the June meeting? We will find out later this year, but for now the Fed released projections giving us an idea of their current thoughts.
What the Federal Reserve Projects
In Fed Chairman Powell’s press conference, he stated that the labor market remains tight, but supply and demand continue to come into balance. Growth remains strong as Fed members increased their Gross Domestic Product (GDP) forecasts for both this year and next year.
The FOMC projects the need for one more rate hike this year bringing the target rate to a range between 5.5% and 5.75%. This is unchanged from the June projection.
Powell stated the committee’s future decisions are not yet made, and it will remain data dependent. The financial markets are not confident the FOMC will raise rates again, as they are currently pricing in around a 55-percent chance of no more hikes this year.
How Long is “Higher for Longer?”
While uncertainty persists around the need for one more rate hike this year, the focus now turns to how long is “higher for longer.” The FOMC reduced projected rate cuts for next year. The committee now sees cutting the target federal funds rate to around 5.1% by the end of 2024 compared to 4.6% in the previous projection. The markets are more in-line with the Fed’s June projection as they are still pricing in a 78% probability that the federal funds rate will be cut below 5% next year.
We will continue to monitor the Fed’s actions. Volatility will likely persist into next year as the Fed continues its battle with inflation. Contact your advisor today if you have any questions about the Federal Reserve’s “higher for longer” restrictive policy. Your financial success matters to us!