Pause in line, although an additional increase remains latent
As expected, the FED kept the reference rate target range unchanged at 5.25 – 5.50%, the highest level in 22 years. This decision was unanimous. The statement revealed language very similar to that of July, confirming that in determining the degree of additional monetary policy tightening that may be appropriate to eventually bring inflation back to 2%, the Committee will take into account all the measures that have been implemented so far, the lags with which monetary policy affects economic activity and inflation, as well as the development of economic and financial factors. It will also continue to evaluate additional information as it emerges and its implications. Within the economic outlook, he noted that recent indicators suggest that activity has been expanding at a solid pace. Although employment gains have decelerated in recent months, it continues to show solid performance, while the unemployment rate has remained low. Inflation, however, remains elevated.
On the other hand, the FED updated its macroeconomic forecasts. In this context, it stated that the federal funds rate could end the year at 5.6%, unchanged compared to the June estimate. This level implies that an additional increase of 25bp would be needed, which could occur during the remainder of the year (November or December meeting). Regarding 2024, the new expectations imply a more restrictive scenario, suggesting that rates will remain high for longer, after raising the rate estimate to 5.1% from the 4.6% forecast in June.
Regarding the economic outlook, GDP could close this year with a growth of 2.1%, substantially higher than the 1% estimate of June. Likewise, for 2024 they forecast an expansion of 1.5% (vs. 1% forecast in June). On the other hand, they positively adjusted the unemployment rate, such that it could close this year at 3.8% from 4.1% and remain above that level in 2024 (vs. 4.5% previously forecast). Finally, core personal consumption inflation (core PCE) would improve to 3.7% from 3.9% previously forecast for the end of this year. Meanwhile, by 2024 there would be a significant improvement, which could bring it to 2.6% (unchanged vs. June’s forecast).
During his press conference, Jerome Powell emphasized that the Committee is prepared to tighten conditions further if necessary. However, they will continue to make decisions on a meeting-by-meeting basis, taking into account all the information that becomes available, and evaluating the implications that this could have on economic activity and inflation.
FED Indicators Update (September vs. June)
Source: Federal Reserve