The Federal Reserve met yesterday and raised the overnight Fed Funds target rate by 75bps to 3.00% – 3.25%, matching the market consensus. That part was no surprise… but the forecast for future Fed Funds rates was more hawkish than market expectations, and that put pressure on both front-end Treasuries and equities. The long end of the curve did rally on the news, furthering the yield curve inversion (at 52bps it’s the largest inversion since 1981).
In other words, there was no Fed pivot that the markets had hoped for that aided the rally in the summer.
The updated projection by the Fed shows the median rate reaching 4.25% – 4.50% by year-end. While not consensus, six participants have the rate peaking at 4.75% – 5.00% in 2023 – these are substantially higher projections than were made a few months ago.
Rate cuts are now projected to start in 2024, but this date keeps moving further out as well. It appears the markets are starting to believe the Fed will keep rates higher for longer. Not long ago, rate cuts were projected to start early in 2023!
The Fed now sees inflation as more stubborn than previously thought. In June they had projected inflation would move quickly lower, but that is no longer the case. They now project Core PCE to be at 4.5% at the end of this year, down from the current levels of 4.8%. They are also projecting Core PCE to still be at 3.1% at the end of 2023 and 2.3% at the end of 2024.
The Fed has mostly dropped the “soft landing” talk, but still does not project the economy to go into recession (but do they ever?). While it does not expect unemployment to rise substantially, it is projecting the unemployment rate to hit 4.4% in 2024. That is 0.7% higher than the current rate. There has never been a situation where the unemployment rate rose more than about 0.5% without the economy entering a recession.
That being said, the S&P 500 (and other indices) are back to extreme oversold conditions (per Bespoke). A relief rally would not be surprising at all given the circumstances.
Source: Aptus Capital Advisors, Bespoke
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