Unless I missed something, the only difference between today’s FOMC statement and the one released on November 2nd was the change in dates. I don’t think there was one change to the text. Of course, all one has to do is look at the market reaction to know that the Summary of Economic Projections is what has changed. With the fed funds rate now at a range of 4.25-4.5%, the median dot plot sees a 5.1% fed funds rate next year, up 50 bps from the forecast given in September. The dots see rate cuts in 2024 but only to a mean of 4.1%.
Modest stagflation is highlighted in the 2023 economic estimates as while the Fed expects inflation to continue to moderate, they raised their estimate vs the one given in September at the same time they forecast GDP growth in 2023 of only .5% vs 1.2% previously. They see core PCE at 3.5% vs 3.1% previously. They don’t see core PCE near 2% until 2025. With regards to how they see all of 2022 shaping up, they see more pronounced stagflation with their GDP growth estimate of .5% (vs .2% estimated in September) and 4.8% core inflation (vs 4.5% seen in September).
With the unemployment rate, little economic growth in their forecasts results in a 4.6% rate in 2023 vs the 4.4% estimate they gave in September. They expect that level to hold in 2024.
Bottom line, we’re now splitting hairs here on whether the fed funds rate ends up at 5-5.25% or 4.5-4.75% as previously forecasted, especially after such a dramatic rise already. Most importantly, we should be acknowledging that interest rates are going to stay high for longer and a continued adjustment that the economy and markets have to deal with. Just keeping rates at a high level for a while is itself a form of monetary tightening because of a lot of debt that will reprice at higher rates in coming years.
To give a real life example of this, if one has bond maturities in 2023 and 2024, they were ok in 2022 but next year and the year after creates a likely doubling in their interest expense on whatever is maturing. The maturity wall really picks up in 2024 according to stats I’ve seen. Thus, the economic impact can drag out here and something we need to be aware of. To what I said this morning, maybe a mild recession is here but a mild recovery could be the only thing that follows.
Peter is the Chief Investment Officer at Bleakley Advisory Group and is a CNBC contributor. Each day The Boock Report provides summaries and commentary on the macro data and news that matter, with analysis of what it all means and how it fits together.