Fed projects rosier outlook for 2023, but with higher rates

The Federal Reserve looked bullish on a “soft landing” scenario for the economy following the latest meeting of its interest-rate setting committee, which concluded Wednesday with a decision to hold rates where they are at a range of 5.25 percent to 5.5 percent.

While U.S. central bankers made healthier projections on key economic metrics like the unemployment rate, the path of core inflation, and gross domestic product, they also foresaw that interest rates will need to remain higher for longer.

The bank held its 2023 interest rate projection at 5.6 percent, implying one further quarter-point hike this year, but raised its benchmark by a half percentage point in 2024 and 2025.

“We have the ability to be careful at this point and move carefully, and that's what we're planning to do,” Fed Chairman Jerome Powell told reporters at a Wednesday press conference.

This is the second time the panel of Fed officials has elected to pause rates in the six policy meetings of the Federal Open Market Committee (FOMC) this year, a marked slowdown in its series of rate hikes to cool inflation.

Inflation has fallen precipitously from its 9 percent peak last summer but is still above the Fed’s 2 percent target at 3.7 percent. Following a year of declines in the consumer price index (CPI), inflation ticked up in both July and August.

Rates remain at a 22-year high, saddling Americans with greater borrowing costs on car loans, mortgages and ballooning credit card debt.

The Fed doesn’t see those rates coming down any time soon.

Fed delivers Goldilocks projections for remainder of year

The Fed’s latest summary of economic projections is rosy, suggesting the bank’s desired “soft landing” scenario for the economy in the aftermath of the booming recovery from the pandemic could come to pass.

Central bankers more than doubled their expectations for 2023 gross domestic product, increasing yearly output to 2.1 percent from 1 percent in June.

They expect unemployment to hold steady at 3.8 percent, a decrease of 0.3 percentage points from the June projection. Unemployment was revised lower to 4.1 percent from 4.5 percent for 2024 and 2025, as well.

“Economic activity has been stronger than we expected it to be — stronger than I think everyone expected,” Powell said during a Wednesday press conference.

Economists have been sharing the Fed’s optimism.

“A lot of professional forecasters and the public have been forecasting a recession for a year and a half now, and you see many statements that it’s inevitable. I believed all along that it’s far from inevitable,” economist Jeffrey Frankel, a former member of the recession-designating business cycle dating committee of the National Bureau of Economic Research (NBER), told The Hill.

“It would be more likely than in a random year, but the odds are against it. I think we have so far been on the path for a soft landing. They said it couldn’t be done, and maybe it will fail, but this is what a soft landing would look like,” he added.

Interest rates may be higher for longer than expected

Fed officials projected an extended runway on rate cuts.

On the current economic path, Powell said interest rates may remain above 5 percent through the end of 2024, suggesting the Fed may wait longer to cut rates than originally anticipated.

The Fed chairman reiterated the need for restrictive monetary policy, even after relatively sunny reports.

“These good inflation readings that we've been seeing for the last three months, we want to see that it's more than just three months,” Powell said.

Powell pointed to cooling labor market conditions that haven’t triggered a huge uptick in unemployment but noted there’s more work to be done to rebalance the labor market.

“Reducing inflation is likely to require a period of below-trend growth and some softening of labor market conditions,” Powell said. 

Auto strike, oil prices loom as risks

A myriad of external factors from the potential government shutdown to strikes to the resumption of student loan payments could throw a wrench in the Fed’s projections.

“Forecasting is very difficult. Forecasters are a humble lot with much to be humble about,” Powell quipped.

The Fed is closely watching to see the economic impact of the targeted strike the United Auto Workers are waging against three major automakers — Ford, General Motors and Stellantis.

While strikes are limited now, an all-out strike could have a major economic impact. United Auto Workers President Shawn Fain has signaled he’s willing to take that route.

The threat of a government shutdown is also an asterisk on any projection. But Powell declined to comment, saying it was hard to say in advance how much it would affect the next meeting.

“We’d just have to deal with that,” Powell said.