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The United States Federal Open Market Committee unanimously agreed to maintain the current interest rates, concluding their latest monetary policy meeting today. This decision was fully in line with market forecasts, leaving interest rates at a 22-year peak, specifically 5.5% at the upper bound.

However, the Fed also signalled support for future rate rises at the end of the year, but with fewer rises in 2024.

The Committee also disclosed its updated quarterly ‘dot plot,’ which offers a glimpse into the future trajectory of interest rates. While the median rate expectations for the end of 2023 remained unchanged from their June report, there was a notable revision for the end of 2024 rates, which increased from 4.75% in June to 5.25% today (upper bound).

David Goebel, Assistant Director of Investment Strategy at wealth management firm Evelyn Partners said, “Market consensus prior to this meeting was very close to there being no chance that the Fed would raise rates today. That is not to say, however, that the futures market is adamant that we are at the peak in rates. Expectations for one more rate hike, probably at the December or January meetings, were priced around the 40% mark before the meeting – still less likely to happen, but by no means off the table.”

A reason for some of this uncertainty comes from the inflationary outlook. While headline and core inflation rates look reasonably under control, a large contributor to August’s monthly headline figure of 0.6% MoM came from energy. 

Production cuts agreed by the OPEC+ group of countries have seen the price of Brent crude march higher, so we can expect petrol prices to continue to put upward pressure on inflation figures over the coming months.   

This development will have likely weighed on a poll of leading economists conducted by the Financial Times last week, where 90% of those surveyed expected further tightening. This was split between 50% who expected a single further hike, and the other 40%, who went further, saying they expected the committee to raise rates twice or more. 

This suggests many forecasters don’t see monetary policy as sufficiently tight to contain pricing pressures and get inflation back down to the 2% target level. Respondents also expected rates to remain high for some time – about 60% of those of those polled thought that the first interest rate cut, would not occur in until Q3 2024 or later. 

Today, therefore, what is likely of more interest to markets than the rate announcement is the new dot plot, which confirms that committee members’ thinking is perhaps more in line the consensus of economists, than it is with futures markets. It also reflected the ‘higher for longer’ mantra.