What's next for stocks as Fed fully embraces 'higher for longer' mantra
As widely expected, the Fed’s Federal Open Market Committee (FOMC) decided to maintain its benchmark rate within a range of 5.25% to 5.5% on Wednesday. The central bank also did not rule out the possibility of a twelfth rate hike.
Hence, the updated forecast anticipates that rates will peak at a range of 5.5% to 5.75% this year, with a midpoint estimate of 5.6%. This information was outlined in the Summary of Economic Projections that accompanied the monetary policy statement. According to the CME FedWatch Tool, the market is assigning a 31.5% chance that the Fed will hike in November.
The Fed expects the benchmark rate to be at 5.1% next year. This suggests a scenario with just two rate hikes in 2024, compared to the previously projected four rate hikes. Interest rates are then forecasted to drop to 3.9% in 2025, higher than the previous projection of 3.4%. In 2026, rates are expected to further decline to 2.9%.
Inflation and Economic Outlook
The Fed now anticipates that the core personal consumption expenditures price index (core PCE) will average 3.7% for this year, a slight decrease from the prior forecast of 3.9%. In 2024, inflation is estimated to slow to 2.6%, remaining unchanged from the previous projection.
By 2025, it is expected to be at 2.3%, slightly higher than the prior estimate of 2.2%. Ultimately, the Fed projects that inflation will return to the 2% target by 2026.
The unemployment rate is forecasted to be 3.8% in 2023, which is lower than the previous estimate of 4.1%. However, it is expected to rise to 4.1% in 2024 and remain at that level through 2025, down from the prior forecast of 4.5%. By 2026, the unemployment rate is projected to drop to 4.0%.
The growth projection for this year has been
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