Fed Chair Jerome Powell handled the September FOMC meeting well. He was not the primary point of focus, and his messaging was clear. This meeting was all about the Summary of Economic Projections. That’s not to say we agree with his messaging, but we give him high marks for managing his narrative over the last couple of weeks really well.
The problem for the Fed is there’s really no off-ramp from this aggressive stance. The Fed is likely to increase its benchmark federal-funds rate by another 75 basis points at the November Fed meeting, and then another 50 basis points in December (consistent with their new median dot for 2022). In the meantime, we think data will continue to slow between now and the end of the year (and it is already slowing) but it will not deteriorate enough to stop a Fed that has created a very high hurdle to clear.
The Fed is plowing ahead with hikes to clip inflation, even with some evidence now in hand that underlying inflation dynamics are beginning to moderate, and labor is softening too. Powell acknowledged that labor data – job openings, exits, wages, and job gains – all need to deteriorate to prevent higher inflation. However, many labor metrics move slowly and with a lag. The fact that these lagging indicators are beginning to deteriorate in the context of the broad economic slowing already in tow, in combination with this aggressive hiking cycle chugging along, is worrisome. The Fed now expects the unemployment rate to rise to just 4.4%, even with this dynamic in place—we think it will be higher.
Tom Porcelli authored the research report “Daily Deck - FOMC – Powell did good (even if we don’t agree with him),” published on September 21, 2022. For more information, please contact your RBC representative.
