On September 20 at 2p.m. ET the Federal Reserve will announce its decision on interest rates. No change in rates is expected. However, here are some of the key signals that the market will be looking for in assessing future moves in the target range for the Fed Funds rate, which is 5.25% to 5.5% currently.
Changes In Statement Language
The Fed’s press releases announcing their interest rate decisions and reviewing the economic situation changes its language incrementally, by design. In July the Fed referenced “robust” job gains. That language may weaken on recent jobs data. That’s because job openings have reduced and job creation appears to be running at a slower pace. The jobs market appears fine for now, but may be less hot than it was. A weakening jobs market may make the Fed less enthusiastic to raise rates from here.
The Fed’s July statement referenced “the extent of additional policy firming.” That perhaps implies that the question is not whether rates are going up, but how much. In recent statements, some officials have outlined scenarios in which interest rates do not increase from here. As such, that language could be updated to indicate continued restrictive policy, but not necessarily further interest rate hikes from here. The markets would likely react favorably to such a change.
Since its June 2022 decision, when there was disagreement on how big the interest rate increase should be, the Fed has achieved consensus amongst its policy makers on interest rate decisions. As monetary policy becomes more fined tuned, it’s possible that there’s disagreement on the interest rate decision. If so, the press release will note this, as votes are recorded.
However, this is outcome more likely at a later meeting in 2023. For example, at the November or December meeting. This could occur if a majority decides to hold rates steady and some policy makers prefer a rate increase, or vice versa.
Updates To Economic Projections
The Fed will release its Summary of Economic Projections with September’s press release. This requires policy makers to estimate the target Fed Funds rate for the end of 2023. With two meetings remaining after September’s decision, this gives a crystal clear signal as to whether Fed policy makers expect rates to go up again in 2023 or not. This data will be posted here as “Projection Materials” for the September meeting. The Fed often likes to downplay this explicit forecast, given the data dependence of monetary policy, and that economic forecasts are often simply wrong. Still, it remains informative regarding the Fed’s latest thinking, especially for the short term.
Press Conference Comments
The Fed will release minutes from the September meeting on October 11. That will give further color on the Fed’s thinking. However, Fed Chair Jerome Powell’s press conference at 2.30 p.m. ET will offer detailed perspective on the Fed’s latest thinking, especially during the question and answer portion of the prese conference.
Key topics will be the scenarios that could drive rates higher in 2023 and the interest rate path for 2024. For 2024, moderate rate cuts are currently anticipated by the market. On current estimates, rates could fall back to the 4% to 5% range by December 2024.
It’s extremely unlikely that the Fed raises rates at its September meeting, but the CME Fedwatch Tool currently estimates a 40% chance that rates do move up again before the end of 2023. Assuming the Fed Funds rate does not change in September, it’s likely that market assessment of 2023 rate moves will adjust based on tomorrow’s substantial disclosures by the Fed.
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