Fed Leaves Door Open for One More Hike in 2023

The Federal Reserve wrapped up its Open Market Committee meeting yesterday and, as expected, left its funds target rate unchanged at 5.25%-5.50%. This followed a hike in July and an overall string of 11 increases by the central bank to fed funds over a period of 16 months. All 12 governors were in agreement on the decision, even though inflation has moderated over the past year; the latest core CPI reading was 4.3%, down from 9.1% a year ago, and the latest core PCE Price Index reading was 4.2% (both still well above the Fed's target of 2.0%). The decision was widely expected, but now the drama will build for the next meeting. Will the Fed hike again, or will it move to the sidelines (having finally moved ahead of the inflation curve) and assess new economic and pricing data? According to the latest fed funds "dot plot" forecasts by the governors, the central bank's target for the rate at year-end is still 5.63%. That means one more hike. We are not so sure that's a good idea. Our forecast calls for the Fed to keep its target rate steady for the balance of the year as inflation continues to moderate. Yes, shelter and transportation costs remain stubbornly high, and oil prices are back above $90 per barrel. But other prices, such as used cars, medical services, and apparel, are stable or are trending downward on global economic weakness. What's more, the Fed has another mandate besides keeping inflation low. It is also supposed to promote maximum employment. While the latest jobs reports have been consistent with GDP growth, we think the full impact of the Fed's decisions over the past year have yet to be felt by the economy. We think the central bank may well be lowering rates in 2024 if core PCE falls to 3.5% or the jobless rate rises above the 4.0%-4.5% level over the next few quarters.