Threading that needle
Weekly Bond Commentary
Higher for longer, with fewer cuts in 2024.
That about sums up last week’s Federal Reserve meeting. The Fed acknowledged the economy is performing better than had been expected. Activity has expanded at a solid pace and, though job gains have slowed, they remain strong. Inflation, however, remains elevated. To combat this, the Fed anticipates holding rates elevated, and could even raise them again this year even if inflation doesn’t rise. Policymakers will proceed carefully, but it is clear they remain committed to their 2% inflation target. The holy grail of an economic soft landing is possible, but it is not the Fed’s baseline assumption.
The Fed’s updated economic projections from the FOMC meeting provided detail for Chair Powell’s remarks. Policymakers raised GDP growth estimates from 1.0% to 2.1% for 2023 and from 1.1% to 1.5% for 2024. They forecast the unemployment rate to hit 3.8% in 2023, down from 4.1%, and 4.1% in 2024 and 2025, down from 4.5%. They indicated core inflation might be more sticky, projecting it to fall from 3.9% to 3.7% in 2023 and only gradually move to 2.0% by year-end 2026.
So, going into the fourth quarter, the economy is in better shape than most would have thought, having weathered 525 basis points of fed funds increases. In fact, it is expanding, even as global forces point to slowing activity. So far, the Fed has been able to thread the needle.