Fed officials predict soft landing with hard policy

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Remember when everyone expected a Fed pivot? Times were simpler then.

So much for the idea of a dovish surprise blowing out leveraged traders’ positions!* Who cares about economic potholes in 4Q? The Fed’s latest economic projections give the impression that officials are less worried about recession, and will keep rates high.

The FOMC’s new median interest-rate projection for 2025 is 3.9 per cent, a full half-point higher than their projection from June. Below you can compare September’s dots (on the left) to June’s dots (on the right):

The Fed isn’t predicting a recession, by any means.

Officials expect stronger GDP growth in 2023 and 2024 than they did three months ago. They are also predicting lower unemployment and only slightly higher inflation:

It isn’t clear that officials will be able to pull off this “soft landing” business. For one, recession warning bells are still sounding in Treasury markets, and the US yield curve got even more inverted today. Here’s the US two-year Treasury yield’s response to the Fed’s projections, via FactSet:

The market’s response could be seen as a moderately louder warning of a “policy mistake”, or the Fed raising rates so high that it pushes the economy into a recession. (This of course assumes that this Federal Reserve would consider it a mistake to cause a recession.)

Sure, unemployment is still pretty low. And unemployment is known to be a lagging indicator of recession. But hey, maybe this time is different?

*The press conference hasn’t started yet, though, so who knows