U.S. Federal Reserve Holds Steady on Interest Rates Amidst Changing Economic Landscape

By Sightline Wealth Management’s Warren Gerow

The Federal Reserve opted to maintain interest rates at their current levels in a decision released Wednesday, indicating its expectation of one more rate hike before the year’s end while signaling fewer cuts in the coming year than previously projected. This decision is part of the ongoing policy tightening that began in March 2022 and could mark the end of the current cycle if implemented, bringing the total number of hikes to twelve. The move, aligned with market expectations, as investors had fully priced in no change in interest rates, left the federal funds rate within a targeted range of 5.25-5.50% – the highest it has been in approximately 22 years.

While the decision to hold rates steady was expected, there was uncertainty about the Fed’s future direction. The Central Bank’s released documents suggested a bias toward more restrictive policies and a commitment to maintaining higher interest rates for longer.

According to the Fed’s dot-plot projections, there is a likelihood of one more rate increase in the current year, followed by two cuts in 2024, which is a reduction from the previous projection made in June. The dot plot allows Fed members to indicate their views on future interest rate movements anonymously. Twelve participants favored an additional hike in this meeting, while seven opposed it, representing an increase in opposition compared to the June meeting. The projection for the federal funds rate in 2025 also increased, with the median outlook at 3.9%, up from the previous estimate of 3.4%. In the longer term, FOMC members indicated a funds rate of 2.9% in 2026, above the Fed’s neutral interest rate, indicating a potentially more restrictive stance.

In addition to interest rate projections, the FOMC revised its economic growth expectations upward for the current year, with GDP anticipated to grow by 2.1%. This is more than double the June estimate and suggests that the committee does not foresee a recession in the near future. The GDP outlook for 2024 also increased to 1.5% from 1.1%. Furthermore, as measured by the Core Personal Consumption Expenditures Price Index, the expected inflation rate decreased to 3.7%, down 0.2 percentage points from June. The unemployment outlook also improved, with a projection of 3.8%, compared to the previous estimate of 4.1%.

Changes in the post-meeting statement reflected the adjustment in the economic outlook, with the committee characterizing economic activity as “expanding at a solid pace” compared to the previous description of “moderate” growth. Job gains were noted to have “slowed in recent months but remain strong,” contrasting to earlier language describing the employment situation as “robust.”

The Fed’s decision to maintain high-interest rates aligns with the ongoing reduction of its bond holdings, reducing its balance sheet by approximately $815 billion since June 2022. The Fed is allowing up to $95 billion in proceeds from maturing bonds to roll off each month rather than reinvesting them. (While reducing the Fed balance sheet is seen as a positive development, it may contribute to higher bond yields. Central banks have been significant purchasers of government debt in recent years. However, as the Federal Reserve allows debt to mature and reduces its balance sheet, coupled with growing government funding needs due to expanding budget deficits, a significant amount of debt must be absorbed by the private markets. This influx of debt into the private sector is expected to exert upward pressure on bond rates, a trend that may be beyond the central bank’s control).

This decision comes at a critical juncture for the U.S. economy. Fed officials have shifted their perspective from focusing on combating inflation to adopting a more balanced approach. While there are signs that the central bank’s strategy of achieving a soft landing, where inflation is controlled without causing a deep recession, may be working, the future remains uncertain. The job market has remained solid, with a 3.8% unemployment rate, and inflation data has improved, though it still exceeds the Fed’s 2% target. Consumers have displayed resilience in spending despite diminishing savings and rising credit card debt. However, public opinion surveys reveal anxiety about the current state of the economy.

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Important Information:

Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.

Sightline Wealth Management LP (“Sightline”) is an investment dealer and is a member of the Investment Industry Regulatory Organization of Canada (IIROC) and the Canadian Investor Protection Fund (CIPF). Sightline provides management and investment advisory services to high-net-worth individuals and institutional investors.

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