The Fed created the mess that we are living in as it relates to the price dislocations we have suffered across goods, services and various asset classes since 2H 2020. Too much is being made of today’s Fed rate decision and the related projections below. Not enough is being made of the Fed’s anemic QT effort ($1 Trillion to date). Should the Fed trim $3-4 Trillion from its balance sheet over the next 3-4 years, the U.S. economy will stabilize. I just don’t see it happening, especially given that the fiscal side is negotiating the 2024 budget without any restraint given that the debt ceiling has been removed. The U.S. will not see a 2% CPI this year or next. Frankly, the 2% CPI target is essentially irrelevant given that prices have increased by 40% over the past two years on average. Hardly a shock given that the Fed grew the money supply by 40% (thereby diluting the value of money by 40%), from January 2020 – May 2022.
What we got (see Table 1 below):
- Fed Funds Rate: No rate hike. Fed Funds rate is unchanged.
- Real GDP: Uptick in FOMC expectations around Real GDP for 2023 and 2024. 2025 is unchanged. The Fed expects 2026 Real GDP to be unchanged from 2025 and for 2025 Real GDP to be essentially flat with 2024. Sounds like stagflation to me.
- Unemployment Rate: FOMC is more bullish around the unemployment rate.
- Inflation: FOMC expectations are essentially unchanged.
- Fed Funds Rate Path: “Higher for longer” – 50 BPS higher in 2024 and 2025 as compared to the June 2023 FOMC projections.