Federal Reserve officials have emphasized that interest rates will remain higher for a longer period than initially anticipated following their September 19-20 meeting. Although rates were not raised at this particular policy gathering, the minutes of the meeting, set to be released on October 11, will provide further insights into the majority consensus among Fed officials regarding the future direction of the economy. The updated economic projections released on September 20 indicated that interest rates are not expected to be reduced until later in 2024.
Fed Minutes: A Guide to Policy Directions
The minutes of the Federal Open Market Committee meetings, which are typically released several weeks after each meeting, hold significant value as they serve as a policy road map. During the September meeting, the Fed chose to maintain the benchmark interest rate, keeping the targeted federal-funds rate at 5.25%-5.50%. However, the decision to keep rates unchanged was overshadowed by the release of the committee’s latest Summary of Economic Projections (SEP), which revealed a rather optimistic outlook for the U.S. economy. Notably, the SEP indicated a belief among officials that unemployment would decrease and economic growth would surpass previous forecasts. The interest-rate projections further suggested that rates would remain above 5% until the conclusion of the next year.
A Slightly Less Optimistic Tone
Although Fed Chair Jerome Powell maintained a relatively optimistic outlook at his post-meeting press conference, he did express a slightly more pessimistic perspective regarding a potential soft economic landing as his baseline forecast. Additionally, Powell downplayed the significance of the latest dot plot projections, clarifying that they represent individual rate forecasts rather than a concrete plan for the future.
Federal Reserve Watchers Seek Clarity as Financial Conditions Tighten
In anticipation of Wednesday’s release, economists and financial analysts will be closely examining the Fed’s message for more clarity. Several key factors have changed in the past few weeks, including the surge in yields on 10-year U.S. Treasury bonds to a 52-week high of 4.8%, as well as the surprising addition of 336,000 jobs to the U.S. economy in September.
While higher yields contribute to tighter financial conditions, multiple Federal Reserve officials have indicated that this may enable the Fed to maintain its current rate pause. Lorie Logan, President of the Federal Reserve Bank of Dallas, stated on Monday that “financial conditions tightened substantially in recent months,” largely due to movements in longer-term interest rates.
The rise in term premiums, resulting in higher term interest rates, could potentially assist in cooling the economy without the need for additional monetary-policy tightening, as highlighted by Logan and echoed by San Francisco Fed President Mary Daly and Fed Vice Chair for Supervision Michael Barr.
Glenmede, a wealth-management firm, pointed out that the Fed’s economic projections, which convey a message of a prolonged period of higher rates, have influenced market yields. This narrative has also had an impact on stocks, contributing to a challenging September.
However, more volatility may lie ahead. Glenmede’s team emphasized that while equity and bond markets experienced modest corrections during Q3, they may not yet fully reflect the current economic uncertainty.
The highly anticipated Fed minutes are scheduled to be released at 2 p.m. ET.