The Fed held rates steady at their September meeting, and, as evidenced by the latest dot plot, left the door open for another rate hike this year. However, FOMC member projections are rarely a reliable tracing of the actual Fed policy path, and investors should instead turn their focus to the bigger picture implications of the Fed nearing the end of its year-and-a-half-long tightening cycle.

FOMC median Fed funds rate projections versus market expectations
September 2023 versus June 2023 and current Fed funds futures

FOMC median Fed funds rate projections versus market expectations, Sept vs June 2023

Source: Federal Reserve, Principal Asset Management. Data as of September 22, 2023.

During their September meeting, the Federal Reserve (Fed) hit the pause button for the second time in this monetary tightening cycle, keeping policy rates at 5.25%-5.50%. The latest Fed dot plot shows that the median policymaker has penciled in another hike this year and only two cuts next year—a more hawkish bias than in their previous dot plot and more hawkish than the market consensus.

How much emphasis should investors put on the Fed dot plot? Experience suggests that some caution is required. Two years ago, in September 2021, the median policymaker believed that policy rates would sit at just 1% by the end of 2023. A year later, in September 2022, that median dot had moved up to 4.6%—a much more accurate projection, but still 75 basis points off target.

Given the uncertainty of the dot plot, investors should avoid reading it as a guide to Fed policy and instead focus on the growth and inflation fundamentals. The long-awaited economic downturn will likely materialize in 2Q 2024, applying further downward pressure on inflation. Not only will this open the door to gradual policy easing, but it will firmly close the chapter on a key element of discomfort that has plagued markets and investors since liftoff in March of last year.


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