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Markets Tumble on Fed Rate Hold, New Dot-Plot

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As expected, the Fed kept interest rates steady at a range of 5.25-5.50% today, in the first Federal Open Market Committee (FOMC) meeting since July. It’s the second time in three FOMC meetings that the body has decided not to further raise rates. However, its latest dot-plot, which very much resembles the previous dot-plot, indicates that one more hike before the end of the year may be in order.

This dot-plot estimates a 5.6% Fed funds rate through 2023, which is obviously a tick above the 5.5% high range currently. For 2024, this does come down: to 5.1% — same as the previous dot-plot, which would indicate 50 basis points (bps) worth of cuts through all of next year. The dot-plot gets bit more substantial in that it comes down to 3.9% for 2025, which would indicate guidance in a range of 3.75-4.00% by the end of the first year of the next presidential cycle.

Clearly, this is not what those looking for rate cuts in the more near-term were hoping to see in the press release from the FOMC this afternoon, nor in the press conference with Fed Chair Jerome Powell which began shortly after the release. Powell gently touted the Fed’s “restrictive” monetary policy on pulling down inflation to its optimum 2% level. When asked what it would take for the Fed to ease expectations on the optimum rate, Powell merely said, “We’ll know it by its works.” Meaning: they don’t know yet. That said, Powell has not discounted it as a possibility.

These were not dishonest answers, as far as anyone can tell, but they certainly weren’t shooting rainbows in an arc over the stock market, either. This, as much as anything, may explain this afternoon’s market slide across all indices into the red, or deeper into it, in the Nasdaq’s case. It’s a fairly curious move for market participants to take when the Fed announces it won’t be raising interest rates. But when we consider that investors were looking for significant rate cuts next year — and Powell is only suggesting we’ll get down to where we were in May of this year by the end of 2024 — it throws a damper on expectations.

Of course, the vague language Powell used did leave room open for cuts — but only if the economy hits a snag and we tumble into a more meaningful recession than the one we technically saw in the first half of 2022. As of now, Powell doesn’t see this: “Consumer spending has been robust,” “GDP is expanding at a solid pace,” etc. He did state that the projected GDP of 2023 — 2.1% — will give way to the downside in 2024 — 1.5%. If that happens, we may see some industries tread precariously close to a recession, and at that point we will likely see something of a different dot-plot from the Fed.

In any case, we are currently in the process of taking out one-month lows, meaning the pre-Labor Day bullish push has been tapped out, and then some. The Dow slipped -0.22% on the day after spending almost the entire session in the green, the S&P 500 is -0.94% on the day, the Nasdaq drained -209 points from its market-leading year to date, -1.53%, and the small-cap Russell 2000 ended -0.72%.

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