If the Fed continues its 'higher for longer' slogan, what will happen to the stock market?
Stock Market News
Date:-21-09-2023
The Federal Open Market Committee (FOMC) of the Federal Reserve Board kept its benchmark rate unchanged on Wednesday, keeping it in a range of 5.25% to 5.5%. The Fed also left the door open to a possible rate increase number twelve.
As a result, the most recent projection indicates that interest rates will peak at 5.5% to 5.75% this year, with a median estimate of 5.6%. The accompanying Summary of Economic Projections provided more context for the monetary policy announcement. The market anticipates a 31.5% chance of a Fed raise in November, per the CME FedWatch Tool.
Next year, the Federal Reserve projects the benchmark rate to be 5.1%. Rather than the four rate increases predicted previously, this predicts a scenario with just two increases in 2024. After that, in 2025, interest rates are predicted to fall to 3.9%, which is higher than the earlier prediction of 3.4%. In 2026, we anticipate a further drop to 2.9%.
The Future of Inflation and the Economy
The Federal Reserve has lowered its outlook for the core personal consumption expenditures price index (core PCE) this year from 3.9% to 3.7%. The consensus forecast calls for inflation to drop to 2.6% in 2024, which is unchanged from the prior forecast.
It is projected to reach 2.3% by 2025, up from the previous projection of 2.2%. Inflation is expected to return to the Fed's 2% target by 2026.
The projected unemployment rate for 2023 is 3.8%, which is down from the prior projection of 4.1%. It is predicted to increase to 4.1% in 2024 and stay at that level through 2025, which is a decrease from the previous prediction of 4.5%. The unemployment rate is expected to fall to 4% by the year 2026.
The previously announced 2.1% growth rate for 2018 is now expected to be achieved. Compared to the 1% estimate presented at the previous meeting in June, this is a significant increase. Growth projections for 2024 have also been raised, to 1.5%. Compared to the prior estimate, this is an increase.
Here's What the FOMC Statement Means, According to These 5 Wall Street Economists
According to JPMorgan, "the FOMC did more than just lean into the soft-landing narrative; they are now forecasting only a trivial weakening in growth and labor markets next year and beyond." This optimistic forecast makes it clear why the dots now predict less easing in '24 and '25... Overtightening would be a growing problem if it weren't for the fact that the Committee's more powerful members are probably less hawkish than the median dot.
We continue to believe that the rate increase in July marked the end of this tightening cycle," said Nomura. Assuming a recession begins in the fourth quarter, this is not a tough call to make. Slowing inflation and continuing weakness in the labor market would make any further rate hikes a close call even in a soft landing scenario.
HSBC has reiterated that it does not expect any more rate increases. Our forecast for the first Fed rate drop, however, has been pushed out to the third quarter of 2024 (from the second quarter). In addition, instead of predicting 75bp in cumulative rate decreases in 2024, we now anticipate 50bp. Increased from 4.50-4.75%, our projected federal funds target range for the end of 2024 is now 4.75-5.00%. We see policy rate risks as highly symmetrical throughout 2024.
According to Morgan Stanley, "core PCE has so far unfolded in line with our outlook for 3.3% 4Q/4Q this year, and we continue to see a soft landing for the economy and remain more optimistic on the deflationary process than the Fed." We expect the policy rate to remain unchanged through 2024, with the Fed starting a program of quarterly 25bp rate decreases in March, but the data flow will be important and will define our projection for the funds rate.
Bank of America: "We made no changes to the forward guidance language, which leaves the door open for future rate hikes. This was entirely predictable, so we're sticking with our Fed prediction of "one more hike in November, but it's close."
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