Market Update: The Fed Decision and Outlook
The Fed has Spoken
This week, the primary focus of the markets has been on Central Banks around the world, primarily the Federal Reserve.
Economists and investors alike read today’s press release and Summary of Economic Projections, and parsed each of Chairman Powell’s remarks, looking for hints about the future. Although always of great interest, the Fed’s position may be of even greater importance now due to a lack of significant visibility in earnings for another month, or so. This is because the vast majority of second quarter earnings are in, and it will be about a month before third quarter earnings season begins in earnest.
Summary of today’s Press Release
The opening paragraph of today’s press release said it best: “Recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have slowed in recent months but remain strong, and the unemployment rate has remained low. Inflation remains elevated.”
Putting it all Together
Although the Fed made changes to next year’s outlook, the 2023 forecast remains the same. The Fed’s outlook suggests interest rates will remain higher for longer. Corporate earnings have been better than initially expected and appear to improve in Q4 and for 2024. The equity market is trading close to the five-year average. With 2024 rates no longer expected to drop as significantly, the one-year outlook for bonds is not as rosy as thought even a few months ago, yet still encouraging.
The Details:
What the Fed said about GDP
The Fed’s projections on real GDP for 2023 went from 1.0% in June to 2.1% today. The median forecast for 2024 went from 1.1% to 1.5% and the 2025 forecast remained at a growth rate of 1.8%.
As a side note, the latest GDPNow estimate of Q3 GDP (as of 9/19/23) by the Atlanta Fed stands at 4.9%. Although the estimate normally is higher than the eventual reading, the current estimate is significantly higher than 2Q GDP growth of 2.4% and Q1 of 2.0%.
What the Fed said about Interest Rates
As widely expected, the FOMC (Federal Open Market Committee) left the Fed Funds rates as-is at 5 ¼ - 5 ½ %. Furthermore, quantitative tightening will continue as the Fed reduces its balance sheet. Perhaps of greatest interest was the outlook for future rates made by the FOMC. The 2023 outlook remained the same as their last update in June. The median average projection by committee members is for one more 25bps hike to occur this year. However, now the committee is calling for a drop of 50bps in 2024 (down from the June forecast of 100bps). And the 2025 Fed Funds forecast was changed to 3.9% from the prior 3.4% ending rate.
What the Fed said about Jobs
The current forecast for unemployment has improved since the June dot plots. The median average unemployment rate is expected to remain strong at 3.8% this year, and 4.1% in 2024 and 2025.
What the Fed said about Inflation
The Fed sees the PCE (Personal Consumption Expenditures) inflation rate to be at 3.3% this year, 2.5% in 2024 and 2.2% in 2025.
Corporate Earnings
Like Q1, earnings in Q2 were weak but not as bad as initially feared. Therefore, earnings were better than originally forecasted. Q3 earnings are expected to be slightly positive, with Q4 EPS anticipated to be up 8.2%. If this comes to fruition, S&P EPS would be up 1.2% for 2023. Street consensus EPS for 2024 looks more impressive with a growth rate of 12.1%. This brings the 12- month forward P/E multiple to 18.8. To put this in perspective, the five-year average is 18.8 and the ten-year 17.5. All earnings data and multiples are per FactSet.
Additional Information
With great attention now on the Fed, some may find a recent talk on the Federal Reserve of interest. Due to feedback, sharing the link again: