Pausing for longer?

The Federal Open Market Committee, at its September meeting, decided to leave rates unchanged. The move was well anticipated and keeps the fed funds rate’s target range at 5.25% to 5.5%.

Communication in Fed Chair Jerome Powell’s press conference was generally hawkish, keeping the door open for future hikes and deftly avoiding being interpreted as declaring victory.

However, the FOMC’s latest forecasts signal a growing sense of optimism within the committee that little else needs to be done to bring inflation to its target and that a recession is decreasingly likely.

Moody’s Analytics views the FOMC’s policy stance as sufficiently restrictive to bring inflation to the central bank’s 2% target. Our expectation is that July’s rate hike was the FOMC’s last and our latest baseline puts the first rate cut in mid-2024. September’s Summary of Economic Projections shows ours and the Fed’s thinking have come into closer alignment.

September’s pause was expected and anticipation was instead trained on the committee’s updated forecasts. Since they were last published in June, FOMC members have grown more optimistic about the U.S. economy. The latest SEP shows the median estimate for GDP in 2023 rose from 1% in July to 2.1% in September and from 1.1% to 1.5% in 2024.

The strengthening of the U.S. economy also resulted in a lower unemployment rate forecast. The median estimate for the unemployment rate was lowered from 4.1% to 3.8% in 2023 and from 4.5% to 4.1% in both 2024 and 2025. The reacceleration of the U.S. economy this summer, evidenced by a steady flow of strong consumer, GDP and labour market data, drove the improved outlook.

Despite a stronger outlook, inflation’s path was lowered, and a slimmer majority of committee members expect another rate hike will be needed this year. The median estimate for the fed funds rate in 2023 was unchanged. The median expectation for core PCE in 2023 was lowered from 3.9% to 3.7%. Participants did, however, push back their timeline for the first rate cut.

Within the SEP is the latest dot plot. Seven of 19 participants believe the fed funds rate is sufficiently restrictive. The remainder believe another 0.25-percentage point hike would do the trick. None believe a further half point is necessary. In June, three expected the upper bound of the fed funds rate would need to hit 6% or more.

There were no dissenting votes at September’s meeting, which contained a full roster of voting members after Adriana Kugler filled the position left open by Lael Brainard’s resignation. It was also the first meeting with Philip Jefferson as vice chair.

Strike and oil

Swirling over the central bank are two headwinds picking up speed and threatening to stall the progress. In coordination with OPEC, Saudi Arabia opted to cut oil production in late June.

Since then, energy prices have embarked on a steady climb upward. In July, the CPI for energy jumped 5.6% from the month before, driven by a 10.6% increase in gasoline prices. This caused headline CPI to rise at its fastest monthly rate since June 2022—the post-pandemic bout of inflation’s peak in the U.S.

The second headwind blowing is the United Auto Workers strike. Should the strike last through October, we estimate used-vehicle prices will be 10% higher than if the work stoppage did not occur. New-vehicle prices will be less affected immediately but would increase by 5% in the second half of 2024.

Both events are being closely monitored by the ratesetting FOMC, though neither is likely to derail the committee’s near-term plans. We expect oil prices to retreat, with West Texas Intermediate averaging a little more than $80 per barrel in 2024.

Higher prices will enable new sources of production to come on line in the Americas. Oil prices are well above the break-even cost of extraction in U.S. shale formations. We also expect Saudi Arabia to lower its production cut from 1 million barrels per day. As for the strike, our baseline calls for the dispute to be over before that degree of disruption occurs.