Federal Reserve expected to keep rate unchanged — then what?

With the Federal Open Market Committee widely expected to keep rates unchanged at its meeting on Wednesday, investors and economists will keep their eyes trained on the policymakers’ economic projections that are released at the same time. In addition, they’ll be listening for any hints about the likely path at following Fed meetings.

Almost all Fed officials have been repeating Fed Chair Jerome Powell’s mantra of “higher for longer.” The summary of economic projections (“SEP”) will offer a view of how high the central bank may go and for how long. Keep in mind that the projections do not represent decisions on a rate path. Rather, they reflect individual Fed members’ expectations of how the economy and policy will unfold.

Rate path probabilities

In the June 2023 SEP, the federal funds rate median projection was 5.5 % for the end of 2023 and 4.6% at the end of 2024. Its rate currently stands at 5.25%-5.50%. Meanwhile, traders give a 97% probability that the rate will stay unchanged on Wednesday and a 61.1% likelihood that the policy rate will remain unchanged at the Dec. 12-13 meeting, according to the CME FedWatch tool.

“In the Fed’s dot plot, what you’re likely to see going into 2024 is fewer rate cuts, which has sort of been priced into the market at this point, but I don’t think it has flowed through to investors’ expectations of where interest rates will be,” said Wakefield Asset Management Partner Greg Brittain in an interview with Seeking Alpha.

He expects that the median fed funds rate at the end of 2024 will tick up a little over 4.6%. In the past couple of economic projections, Fed officials had increased their inflation expectations. Brittain doesn’t expect that this time, as shelter costs are expected to decline in the next three to four months.

Source: Federal Reserve.

Wild cards to watch

Uncertainty always looms over the Fed’s economic outlook, but Powell may emphasize that fact even more during his post-decision press conference given the recent auto workers’ strike and a potential government shutdown.

The latter possibility may worry the data-dependent central bank even more, as government agencies would stop issuing economic reports during a shutdown. The September jobs report is scheduled to come out on Oct. 6, days after the government’s fiscal 2023 ends on Sept. 30.

“There are a lot of big overhangs out there,” Brittain said. While he doesn’t expect a prolonged government shutdown, the UAW strike and the restart of student loan repayments are also likely to constrain GDP slightly.

He expects that market expectations are “slightly better than 50/50” that the Fed is done with rate hikes.

Risk in acting too late

Overall, though, the economy “has remained pretty resilient.” Brittain doesn’t expect a hard landing in the next six to nine months. After that, it’s harder to predict.

“My concern about a hard landing potentially occurring is more about the Fed being too late to react to economic conditions overall. And I think that’s going to be a challenge given that most people think they were behind the curve going into 2022.”

Economists expect that the Fed has finished hiking rates and will start to cut rates as soon as Q2 2024, according to a recent Reuters poll. However, economists surveyed by Bloomberg expect Fed officials to pencil in one more rate hike this year and lower its policy rate next May.

Diane Swonk, chief economist at KPMG US, expects the FOMC to leave the door open for at least one more rate hike.

The Fed’s dot plot for next year may be cautious. The central bank is still playing defense on inflation and doesn’t want to signal anything that might get financial markets to front-run them on rate cuts,” Swonk said in a recent blog.