The FOMC Skips September Rate Hike...

As some anticipated, the Federal Open Market Committee (FOMC) held interest rates steady at its September policy meeting. The FOMC had raised its benchmark federal funds rate at their July 2023 meeting to a range between 5.25% and 5.5%, a 22-year high. FOMC Chair Powell suggested that they were prepared to raise rates one more time this year, at either of their two remaining meetings, to combat inflation.[1]

...But May Not Be Done Yet

While inflation is well down from its 9.1% peak last year, it is still higher than the FOMC target. Their projection for annual core inflation, which excludes volatile food and energy prices, is 3.7% for the fourth quarter - above their 2% target.[1]

Source: https://fred.stlouisfed.org/series/FEDFUNDS

Since rates may be raised again, many economists have described the latest FOMC decision to hold rates steady as a “skip” instead of a “pause.”

Higher for Longer!

The FOMC has been lifting rates since March 2022 to cool the red hot inflation without pushing the economy into a recessionary deep freeze. It is literally like walking a financial tightrope. In his press conference, Powell said, “a soft landing is our primary objective.” But if inflation remains stubbornly high, he added, “the worst thing we can do is to fail to restore price stability.” The FOMC has a dual mandate of ensuring price stability while also promoting full enployment.

Thread the needle?[2]

However, with 2023 economic growth stronger than anticipated, most FOMC members expect they will need to keep interest rates near their current level through next year. The median projections showed the federal funds rate being lowered to around 5% by the end of 2024. That would imply two rate cuts next year if the Fed hikes again this year. Further rate cuts may be pushed into 2025.

Last Wednesday, the stock market reacted negatively to the FOMC update. But since 1984, when the Fed has stopped its rate-hiking cycles, stock prices have trended higher. The medium returns of the S&P 500 for the 3-, 12- and 30-month periods after the FOMC tightening cycle ends were +7.7%, +19.1%, and +62%, respectively. Of course, past performance is no guarantee of future results.[3]

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[1] WSJ.com, September 20, 2023

https://www.wsj.com/economy/central-banking/federal-reserve-powell-interest-rates-ba600bf0 

[2] BusinessInsider.com, July 25, 2023

https://www.businessinsider.com/economists-recession-forecasts-soft-landing-inflation-downturn-fed-rate-hike-2023-7 

[3] Investing.com, March 30, 2023.The S&P 500 Composite Index is an unmanaged index that is considered representative of the overall U.S. stock market. Index performance is not indicative of the past performance of a particular investment. Individuals cannot invest directly in an index. The return and principal value of stock prices will fluctuate as market conditions change. And shares, when sold, may be worth more or less than their original cost.

https://www.investing.com/analysis/dont-stop-believin-stock-market-and-sentiment-results-200636784