Higher Real Rates In Dot Plot Underpin More Restrictive Outlook (2/2)

Powell basically pinned the higher rate dots on stronger economic activity than had been expected, and that stacks up with the doubling of 2023's GDP forecast and yet another downward revision to the unemployment median.

• But on the other hand core inflation was revised lower for 2023 (and at this point it would be no surprise to see it come in lower than the 3.7% in the SEP) with 2024 steady. And he also cited progress on supply and demand in the labor market, and the last three "very good" inflation readings, and noted again that lags from ongoing hikes will be a factor ("the full effects are yet to be felt").
• The new SEP policy outlook points to a tougher battle ahead. On a Funds rate minus core PCE basis, the Dot Plot now implies real rates of 1.9% for 2023 (was 1.7% in June), 2.5% in 2024 (was 2% in June), and 1.6% in 2025 (was 1.2% in June). Powell continues to be reluctant to sketch out an estimate of the terminal rate: "You know sufficiently restrictive only when you see it". And "It's certainly plausible" that the neutral rate at this moment is higher than the longer-run rate in the SEP.
• This will be a central question for FOMC participants over the coming months.
• It doesn't look like a November hike is the central plan - but December is plausible if the data takes a shift, with economic growth seemingly becoming a more important variable.