Federal Reserve Leaves Interest Rates Unchanged as Officials Monitor Conditions

Andrew Moran
By Andrew Moran
November 1, 2023Business News

The Federal Reserve left interest rates unchanged at the November Federal Open Market Committee (FOMC) policy meeting, keeping in line with economists’ expectations.

Central bank officials voted to keep the benchmark fed funds rate at a range of 5.25 percent and 5.50 percent.

Rate-setting Committee members are prepared to adjust monetary policy “as appropriate if risks emerge that could impede the attainment of the Committee’s goals.” The FOMC will take into account cumulative monetary tightening and the lags that can affect economic activity, inflation, and financial developments.

According to the FOMC, the U.S. economy expanded at a robust pace in the third quarter. While employment gains have moderated since the beginning of the year, the labor market remains strong. Inflation remains elevated and the banking system “is sound and resilient.”

“Tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain,” the FOMC said in a statement.

The Fed will continue reducing its holdings of Treasury securities, agency debt, and agency mortgage-backed securities. Since the central bank launched its quantitative tightening campaign in March 2022, the balance sheet has fallen by about $1 trillion to below $8 trillion.

Fed Rate Outlook

The new consensus between the Federal Reserve and the financial markets is that interest rates will be higher for longer.

In September, the Fed’s Summary of Economic Projections (SEP) revealed officials trimming their rate cut expectations by 50 basis points in 2024 and 2025 to 5.1 percent and 3.9 percent, respectively.

Economists, strategists, and market analysts appear to be on board with this mantra, according to a new CNBC Fed Survey.

The latest results showed a majority (57 percent) of respondents anticipating the Fed will keep rates in the same 5.25 percent and 5.5 percent range until September 2024. This past summer, they had projected rate cuts at the start of next year.

However, there is a divergence between the SEP data and survey figures. While central bank officials think the median policy rate will be above 5 percent next year, survey participants forecast 4.6 percent by the end of 2024.

“I believe Powell & Co. can now be patient, sit back, and see how all the tightening that has already taken place on the short end and recently on the long end plays out,” wrote Peter Boockvar, chief investment officer for Bleakley Financial Group, in the survey. “And it will play out as higher rates continue to squeeze more and more households.”

About That Recession

Recession forecasts are not as fierce as they were a year ago.

The CNBC Fed Survey showed a 49 percent probability of a recession in the next 12 months. The odds of a soft landing—a Goldilocks scenario of low inflation, a solid labor market, and economic growth—clocked in at 42 percent.

A National Association of Business Economists (NABE) survey shows most respondents think the U.S. economy will avoid a recession in the next 12 months. Fewer than a fifth (18 percent) believe a downturn is likely.

But Nick Galluccio, a portfolio manager at Teton Advisors, envisions a recession next year.

“By the middle of next year, you’ll have some recession, a couple of quarters of negative GDP growth,” Mr. Galluccio said in a note, adding that this would be a catalyst for the Fed to begin thinking about easing policy.

Bill Gross, the so-called bong king and former CIO of Pacific Investment Management Co. (PIMCO), anticipates a recession beginning in the fourth quarter.

“Regional bank carnage and recent rise in auto delinquencies to long-term historical highs indicate U.S. economy slowing significantly,” he wrote on X (previously Twitter). “Recession in 4th quarter.”

Recession signals, including the Conference Board’s Leading Economic Index (LEI), continue to flash red.

The LEI slid by 0.7 percent in September, bringing the six-month average to negative 3.4 percent.

“So far, the U.S. economy has shown considerable resilience despite pressures from rising interest rates and high inflation,” said Justyna Zabinska-La Monica, the senior manager of business cycle indicators at The Conference Board, in the report. “Nonetheless, The Conference Board forecasts that this trend will not be sustained for much longer, and a shallow recession is likely in the first half of 2024.”

While it is still early, various estimates point to modest growth in the October-to-December period.

The widely watched Atlanta Fed Bank GDPNow Model estimate suggests 2.3 percent growth, while the New York Fed Nowcast forecasts 2.6 percent expansion.

From The Epoch Times

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