Economic activity is expanding and inflation remains high

As widely expected, the US Federal Reserve (the Fed) announced in today’s Federal Open Market Committee (FOMC) statement that it’s holding the target range for the federal funds rate at 5.25% - 5.5%. It notes that recent indicators suggest economic activity is expanding, job gains remain strong and the unemployment rate remains low—although inflation continues to be elevated. The long-term goal is to reach a 2% target rate for both unemployment and inflation.

Higher for longer is the theme for US rates

The theme from the Fed today was “higher for longer” says Sandor Polgar, Portfolio Manager, Global Fixed Income at CIBC Asset Management. He confirms focus was less on today’s interest rate decision and more on the “Summary of Economic Projections” and dot plot. “Prior to the meeting, market participants were expecting to see changes to the Fed’s interest rate expectations for 2024 and 2025. The dot plot moved from pricing four cuts in 2024 to now pricing only two cuts as well as showing less easing in monetary policy in 2025. The growth forecast for 2023 was moved up to coincide with recent upside surprises. The 2024 growth forecast also moved higher to further emphasize the no-landing expectation for a recession.”

Mr. Polgar confirms that “market reaction to the rate hold thus far has been muted. The market and Fed are at odds over the pace of cuts required in 2024 and 2025. However, differences in long-run expectations continue to pressure the curve flatter as the Fed shows no changes to their long-term neutral rate.”

No rate change today, but are more hikes coming?

CIBC Capital Markets says another rate hike this year isn’t off the table. The Fed will likely hold rates higher for longer because the FOMC now expects to hold rates about 50 basis points (bps) higher by the end of 2025 than it previously expected in June.

Although the Fed held the target range for the federal funds rate today, it does remain highly attentive to inflation risks. It acknowledges that tighter credit conditions are likely going to weigh on economic activity, hiring and inflation—but to what extent remains uncertain. The FOMC will continue to assess the cumulative tightening of monetary policy, economic activity lags affected by monetary policy, inflation, and economic and financial developments to determine if more policy tightening is needed.

As it continues to work towards bringing inflation down to the target rate of 2%, the Fed will decide if additional policy firming may be needed throughout the remainder of this year and into 2024.

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