Behind the Curve?
#58: With no recession in sight, the Fed isn't finished. What does it mean for the market?
This week’s Federal Open Market Committee (FOMC) meeting managed to both confirm and surprise. While the FOMC opted to leave the Federal Funds rate unchanged as widely expected - the pause - the committee also surprised to the upside with its Dot Plot.
The Dot Plot, the Fed’s form of forward guidance, was revised to show two more hikes in 2023 and a higher expected rate in both 2024 and 2025. For some, this beefed-up forward guidance was merely jawboning - tough talk to counterbalance the first pause in the past ten meetings.
This is wishful thinking.
Along with the revised projections for the Federal Funds target rate, the committee members upgraded their forecasts of economic activity and inflation - acknowledging what the real-time data has made clear. Rather than tough talk, the Fed is coming to realize that its policy may be falling behind the curve, leading to an outright loosening of financial conditions and a reacceleration of economic activity.
There is no sign of an imminent recession other than cherry-picked indicators. Payrolls, personal income, and consumption show no signs of slowing. Federal deficit representing over 5% of GDP adds fuel to the fire. Meanwhile, continued declines in headline inflation will prove more challenging as core inflation remains sticky and gasoline prices turn the corner on a year-over-year basis.
Rather than a recession and easing of monetary policy, we are more likely to experience continued economic growth and tighter policy.
This week, we cover the shifting landscape and its implications:
Inflation’s Second Act
Implications for the Market