Fed rate announcement: no change

 As expected, the two-day FOMC meeting ended with the Fed keeping the funds target unchanged at 5.25-5.50 percent.  The press release continues to talk of "solid" economic activity, "strong" job gains and "elevated" inflation. Overall, the wording is very little changed from the July FOMC, and seems to suggest that the tightening cycle is either at an end or at least very near to it. 

This extract from the longest paragraph of the release summarizes the Fed's by now well-established view on the outlook:

The Committee will continue to assess additional information and its implications for monetary policy. In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments,

Today's meeting also produced an update of the periodic chart deck that allows us a more detailed insight into the FOMC's thinking. The Fed now expects real GDP growth to average very close to 2 percent in each of the next three years, in line with the economy's estimated growth potential. If this is achieved, it will be the textbook example of a soft landing. The PCE deflators, both headline and core, are expected to have a "2 handle" (i.e. to be "2 point something") starting in 2024 and to return to the actual 2 percent target by 2026. 

Then there is the famous "dot plot" that shows the expectations of FOMC members for the level of the funds target,  For now, a small majority of the Committee appears to expect one further rate hike before the end of 2023. However, only one member is looking for rates to move still higher in 2024, with most expecting rates to fall at least slightly during that year and to continue to decline after that.  In line with recent Fed rhetoric, there is nothing to support the idea that rate cuts will either come early or be very aggressive when they do come. 

The overall impression we can take from this is that while the Fed may not be ready to call "job done", it is very confident that it is on the right track and sees no need for a significant change of course.  If the economy really is set to grow at a rate in line with potential over the next three years, there is no obvious need to contemplate rate cuts until it is completely clear that inflation is heading back to the 2 percent target. Things can change quickly, as a prospective government shutdown, a possibly lengthy auto makers strike and uncertainty over the strength in oil prices make all too clear.  For now, however, it seems that any changes in Fed policy over the next six to twelve months will be in the nature of tweaks rather than sudden shifts.