What We’re Looking For in Updated Fed Economic Projections
Sizing up the Fed’s meeting calendar suggests ample policy flexibility at Powell's disposal.
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Because part of the Portfolio’s aim is to help members become more savvy investors, as we get ready for the Fed’s policy announcement and updated set of economic projections, we’re sharing with you the set of economic projections that the Fed published in June.
When we review Wednesday's set of economic projections, we’ll be comparing the two to see not only what’s changed but the magnitude of those changes. Our thinking remains that the Fed isn’t going to telegraph the degree of rate cuts found in the CME FedWatch Tool. As of Wednesday morning, that tool reflects expectations for 125 basis points in cuts this year, including a 50 basis point cut for Wednesday and another 100 basis points to 125 basis points next year.
When we look at the table above, we see that back in June, the Fed expected just one rate cut this year (5.1%) and potentially four in 2025 (4.1%) for the fed funds rate.
It also forecasted GDP for this year to come in at 2.1%. Tracing the data since the Fed published those projections on June 12, 2024, the pace of job creation has slowed, we’ve gotten mixed signals on the domestic manufacturing economy, inflation data has improved and the service economy has continued to grow. All told, the second estimate of 2Q 2024 GDP came in at 2.8% and, so far, the Atlanta Fed’s GDPNow forecast shows a rolling GDP figure of 3.0% for the current quarter.
That composite of the economy suggests that, while the Fed will embark on a rate-cutting cycle, the probable pace of that cycle leaves room to disappoint the market. In addition to the data not supporting a hard-landing scenario that would justify the aggressive rate cuts expected by the market, we do not see the Fed wanting to risk undoing some of the progress it has made on inflation.
Here is a look at the calendar of upcoming Fed policy meetings:
- November 2024
- December 2024
- January 2024
- March 2024
- May 2024
- June 2025
It has six policy meetings after Wednesday's in the coming nine months, with three in the next four months. That gives the Fed ample flexibility should economic data soften in such a manner that it warrants more aggressive rate-cutting action. Powell recognizes this and that means the Fed can course correct if needed and doesn’t need to lead with a big rate cut.
Once we’ve reviewed the Fed’s new materials on Wednesday afternoon and digest Powell’s comments, we’ll share our reactions as well as any implications. Should the market be forced to reassess the pace of rate cuts and should that lead to a pullback, we have our shopping list and potential price levels in hand. Remember, the reset we saw in April led to a mid-single-digit fall in the market.
We may not see such a move lower, simply because the Fed has started a rate-cutting cycle, but then again, the market is short-term overbought, its valuation is stretched, the Fear & Greed Index is once again flashing “greed” and we have that triple-witching event on Friday. It looks like a good time to sit on the sidelines.
