Analysts On Sept FOMC: "Tensions" In The Economic Projections (3/3)

There was a lot of post-meeting commentary by analysts over the changes to the FOMC's economic projections outside of the Dots themselves - with many pointing out "tensions" in the interplay of the growth vs inflation vs unemployment dynamics they portrayed, and what it means for policy. A few highlights from Deutsche/ JPMorgan/ UBS:

• Deutsche: While the broad contours of the September FOMC were in line with expectations, the details were more hawkish. Despite the median dot showing another hike this year, the Chair's presser expressed limited conviction in that view.
• There are some tensions in the SEP. In particular, if inflation is kept unchanged in the outer years due to the more restrictive stance the Fed undertakes due to higher real rates, through what mechanism does that work, if not through softer growth and a higher unemployment rate? Potential mechanisms that Powell highlighted are through keeping inflation expectations well anchored and possibly slowing the labor market further without lifting the unemployment rate by reducing labor demand more significantly.
• JPMorgan: The FOMC went beyond just leaning into the soft-landing narrative—they are now forecasting only a trivial weakening in growth and labor markets next year and beyond. Given this very rosy outlook it’s not surprising that the dots now project less easing in ’24 and ’25. In a simple Taylor rule the revisions to the dots can be roughly explained by the revision to the economic forecasts. Chair Powell’s comments, however, were less hawkish, as he stressed the conjectural nature of the dots. He also mentioned several times that the Fed will proceed “carefully” given how far they’ve come.
• Even with the more hawkish dots we’re still comfortable thinking that the hiking cycle is over. We would be getting more concerned about the Committee walking into the policy mistake of overtightening if iit weren’t for the fact that the more influential members are likely less hawkish than the median dot.
• UBS: The broader takeaway is that the FOMC is seeking an even more restrictive real rate in 2024 than was apparent in prior SEPs. Chair Powell did not reiterate nor walk that back and kept his options open. Powell appeared hesitant to sound too optimistic on the soft landing outlook but it was not lost on the media participants that the median projections have growth cumulatively at the longer-run rate and an unemployment rate that essentially runs at full employment throughout the forecast horizon – and inflation returns to 2.0%. Higher rates and no harm done.
• Chair Powell failed to say they intended to keep rates high, or higher for longer, but used the word restrictive quite a lot. He also said that next year they would need to consider cutting rates as inflation fell, noting the timing would be uncertain. However, that would not be easing, but in order to maintain a real rate that is sufficiently restrictive to restore price stability.