In commenting on the decision, Chairman Powell emphasised that the economy has slowed from the historically high growth rates of 2021, which reflected the reopening of the economy following the pandemic recession. He noted that recent data suggested modest growth of capital spending and production, that growth in consumer spending has slowed, and that the housing sector has weakened significantly, reflecting higher mortgage rates. Tighter monetary policy and lower growth also appear to be affecting business fixed investment and lower growth abroad is holding back export growth.
The outlook for the US economy as captured by the median projection of the members of the FOMC shows how the Fed expects the economy to evolve. The projections are available for the years 2022-2025 and for the “longer run.”2 Looking at how these projections change from one meeting to the next makes it possible to assess the extent to which the Fed has been surprised by economic developments.
The graph below shows that the Fed has not changed its outlook for PCE inflation materially. It will be about 5-5.5% this year, fall below 3% next year, below 2.5% in 2024 and settle at 2% in the longer run.3 Thus, the Fed is still expecting the surge in inflation to be short lived, but of course longer lasting than it expected a year ago.
What has changed materially since the June FOMC meeting is the outlook for unemployment. The median FOMC member now expects the unemployment rate to rise by 0.6% next year, as opposed to 0.2% in June. Since, historically, an unemployment rate of 4.4% would be very low for an economy being in recession, this graph suggests that the median FOMC member does not predict a recession now.