Breitbart Business Digest: The Fed’s Old Projections Are Walking Dead

Deadheads, Black-Outs, and the Fed’s Head

The action at next week’s Federal Reserve meeting may not be in the statement or the interest rate decision but in the economic projections.

The Fed is now in its self-imposed black-out period prior to the Federal Open Market Committee (FOMC) meeting next week. This means we will not hear any more from Fed officials, leaving analysts and investors a week to speculate on what the Fed might do. This week is also a relatively quiet one for economic data; so there is not much that is likely to change the views of Fed officials.

We know that Fed Chairman Jerome Powell is certainly not obsessing over new data. Journalist Jake Sherman tweeted out a picture of Powell at a concert by Dead & Co (which we’re told is a Grateful Dead cover band) over the weekend. Does the orange hat signal a medium-level alert for the economy?

Fed Chair Jay Powell at the dead and co show in Virginia last night. pic.twitter.com/9L0SOEwCPU

— Jake Sherman (@JakeSherman) June 4, 2023

The Fed Is Not a Democracy

The last few weeks have made it clear that the Fed is divided between ultra-hawks who would like to see interest rates continue to take flight and the softer raptors who think the Fed should perch for a meeting or two to assess the field. There really do not seem to be any doves who are confident we have reached the peak of rates, much less ultra-doves who would start cutting.

It’s notable that despite the divisions among Fed officials, they have successfully talked the market away from the view that significant rate cuts were imminent. On this score they were helped, of course, by the stronger-than-expected data on job openings and payrolls for May. The market-implied odds now favor rates to be at the current level or higher through the end of the year, with the first cut coming in January of 2024. That’s a major shift from the four cuts that had been priced in as recently as two months ago.

The Fed still seems poised to pause next week. The market-implied odds show an 80 percent chance that the Fed leaves the fed funds target unchanged and a 20 percent chance of a 25 basis point hike. While that’s still a lot of uncertainty this close to the meeting and with little economic data to come, we suspect it reflects the Fed’s own view that a pause is very likely. If the Fed wanted to, it could have sent out even more hawkish messages to warn the market that it was underpricing a hike in June.

In any case, Powell appears to favor perching rather than continuing to fly higher. And the Federal Reserve may have the trappings of democracy—such as counting votes—but it is really an authoritarian institution that is bound to bend to the will of the chair. There may be a dissent or even two, but have no doubt that Powell’s preference is what will become policy.

This puts the odds solidly in favor of no hike next week. The statement may change to acknowledge the persistence of inflation and tight labor markets. At his press conference, Powell is likely to attempt to convince markets that the Fed is only taking a time-out on hikes and not declaring the game over.

Projections Should Get More Hawkish

The bigger changes are likely to come from the Fed’s Summary of Economic Projections. Every other meeting, Fed officials write down where they expect various economic metrics to be at the end of the current year, the end of the next two years, and over the longer-run. The Fed then summarizes these by giving us the range of projections, the central tendencies of those projections, and the median projection. It also presents charts that show how these have evolved over time and a “dot plot” showing how many FOMC participants lined up with each projection for the fed funds rate.

The last time we got those projections was March, which seems like another era. The median view was for Gross Domestic Product to rise 0.4 percent from the fourth quarter of 2022 through the fourth quarter of 2023. The unemployment rate was expected to be 4.5 percent by the end of this year. Inflation was estimated to fall to 3.3 percent, with core falling to 3.6 percent. The fed funds rate was expected to be 5.1 percent by year end.

Those now appear to be seriously outdated. GDP appears to be growing at a two percent rate in the second quarter, according to both the Atlanta Fed’s GDPNOW and S&P Global’s purchasing managers’ survey. Even if we slow in the second half, we’re not likely to slow enough to bring the full year down to 0.4 percent growth. So, the GDP estimate will likely be revised up, perhaps significantly.

On the other hand, the estimate for unemployment will likely have to be revised down. While unemployment ticked up to 3.7 percent in May, there’s very little chance that it will rise by another 80 basis points over the next six months.

The personal consumption expenditure (PCE) price index ticked up to 4.4 percent in April and core PCE inflation moved up a tenth of a point to 4.7 percent. Our favorite leading indicator for inflation, the Cleveland Fed’s median inflation, has gone nowhere since December. It has been pinned at exactly 5.8 percent since December, with the exception of March, when it ticked up to 5.9 percent. You would have to make some pretty heroic assumptions about disinflation suddenly taking hold aggressively to stick with the March projections.

How high will Fed officials raise the median projection for inflation? We think it is possible that they raise it all the way up to four percent for headline PCE and slightly higher for core PCE. That would help send the message that Fed officials have come to grips with the persistence of inflation, a crucial part of signaling the market that rates are likely to remain higher for longer.

So, what does that mean for the fed funds projection? If the Fed does not raise the median interest rate projection, it will be signaling that it has been unmoved by two months of data showing far more economic strength than expected. The claim that the Fed is “data dependent” will become a joke. Very likely the Fed’s median projection will show two more quarter-point hikes, which is arguably the minimum to maintain credibility in light of the data.