The US FOMC held the Federal Funds Rate (FFR) in the target range of 5.25-5.50% as expected during the September 2023 meeting and signaled one more rate hike by the end of 2023.

US economic growth continues to remain strong, increasing the likelihood of a ‘soft landing.’ FOMC’s median real GDP projections for 2023 and 2024 were revised upward as US economic growth continues to exceed expectations. The US labor market is showing signs of easing, yet it remains notably tight compared to historical levels. FOMC’s median projections now expect the unemployment rate to peak at 4.1% in 2024-2025, down from the 4.5% peak projected in the June policy.

The FOMC projects inflation to fall below 3% in 2024 and return to the 2% target by 2026. In recent months, headline inflation has been on the rise due to base effects and the recent surge in gasoline prices. The strength of underlying economic growth and the increasing cost of crude oil present potential risks to the inflation outlook. There is a strong correlation between inflation expectations and crude oil prices. An increase in oil prices has the potential to elevate inflation expectations. Additionally, there is limited room for further intervention in oil markets, given that the United States has already substantially reduced its strategic petroleum reserve.

The rate projections for both 2024 and 2025 increased by 50 bps in the September Dot Plot, signaling the FOMC’s expectation for interest rates to remain higher for longer. Powell suggested that the Fed can now “proceed carefully” and emphasized that a soft landing is not the baseline expectation, even though the projections seem to suggest otherwise.

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