Research Reports

The Fed raised short-term rates by another 25 basis points (bp) today and made no changes to the expected peak for short-term rates later this year. That peak is still 5.125% – 50 bp higher than they are today – just like the forecast back in December.

However, there were other significant changes, both explicit and otherwise, to the Federal Reserve’s statement and outlook on monetary policy, as well as the economy. In particular, the economic forecast from the Fed shows real GDP growing 0.4% this year. What’s odd about that forecast is that the Atlanta Fed’s GDP Now model current projects growth at a 3.2% annual rate in the first quarter while we are estimating growth at a roughly 2.0% rate. Even if you take our slower growth rate for Q1, the only way you’d get to a 0.4% growth rate for 2023 as a whole would be for real GDP to be lower in the fourth quarter than it is likely to be in Q1.

In other words, the Fed is likely now forecasting a recession starting later this year even as it continues to say it will not cut rates later this year. Meanwhile, the Fed ticked up the median dot for the end of 2024, suggesting short-term rates will end next year at 4.3% versus a December forecast of 4.1%. Put it all together and we have a Fed prepared to not reduce rates as rapidly during the next recession as it did in 2020 or 2008-09.

Although the Fed noted recent problems in the banking system and that these problems might impact the economy and inflation, the Fed went out of its way to end that portion of the statement with language that it “remains highly attentive to inflation risks.” Notice the emphasis on inflation risks, not downside risk to the economy, which seems like is already built into its forecast.