US Fed Reserve Policy: FOMC doubles GDP growth projection to 2.1% for 2023

By Chicago 5 Min Read

The US Federal Reserve announced its interest rate decision on September 20, after a two-day Federal Open Market Committee (FOMC) meeting and left the benchmark interest rates unchanged at 5.25 per cent – 5.50 per cent. Fed policymakers have raised the US gross domestic product (GDP) projection to 2.1 per cent this year, a notable upgrade from the 1 per cent growth projected in June, and expanding by 1.5 per cent next year.

Fed Chair Jerome Powell-led rate-setting panel also updated the members’ forecasts for a range of economic indicators, from inflation to growth, as well as expectations of future interest rate policy.

Catch live updates of the US Fed Meeting here

FOMC members have left the median projection for interest rates at the end of this year between 5.50 per cent and 5.75 percent, keeping the possibility of another quarter percentage point hike by December, to bring inflation down to the 2 per cent target.

Fed officials project the central bank’s main measure of inflation at 3.3 per cent at year end, compared to June’s forecast of 3.2 per cent, falling to 2.5 per cent by the end of next year, compared with 2.5 per cent seen in June. FOMC estimates US inflation reaching 2.2 per cent by the end of 2025, before finally attaining the 2 per cent goal in 2026.

“The process of getting inflation sustainably down to 2 per cent has a long way to go,” Chair Jerome Powell said at a post-policy press conference. “We’ve seen progress, and we welcome that, but we need to see more progress” before concluding that it’s appropriate to end the rate hikes.

Core inflation, which excludes volatile food and energy prices and is considered a good predictor of future trends, is now expected to fall to 3.7 per cent by year’s end, better than the 3.9 per cent forecast in June.

Powell offered a positive assessment of US consumer health and the labor market, an outlook that keeps alive the chance of averting recession. However, this also likely means that interest rates will remain higher for longer.

Forecasts released by the central bank point to one more rate hike in 2023 and just two interest rate cuts in 2024, down from the prior projection of four cuts next year. After 11 interest rate increases since March last year, US inflation has fallen sharply but remains above the Fed’s long-run target of two per cent, keeping pressure on officials to consider further policy action.

‘’The major policy is that Fed indicated that interest rates will remain higher for longer than expected. Based on Fed’s guidance the markets should not expect any rate cuts for first half of the year while interest rates will remain much higher next year even as inflation keeps coming down,” said Rohit Arora, CEO and Co-founder, Biz2Credit and Biz2X.

‘’Fed also doubled the GDP growth rate for this year as well as lowered the expected unemployment rate. This means that interest rates will remain higher for longer even if inflation comes down. This means that debt will remain most expensive for longer period of time,” said Arora.

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Updated: 21 Sep 2023, 12:57 AM IST

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