Interest rates surged in September as the Federal Reserve left the Federal Funds Rate unchanged at it’s latest policy meeting, instead using hawkish rhetoric and a revised “Dot Plot” to signal that rates will likely stay higher for longer.  Even though the month’s economic data supported the notion of cooling inflation and waning growth, the Atlanta Fed’s GDPNow forecast still suggests economic growth near 5%.  Continued fiscal spending and mounting federal deficits likely have as much to do with the rising level of interest rates as anything else one can point to.

The supply of and demand for labor remains somewhat skewed, with the August Unemployment Rate coming in at 3.8%, albeit up slightly from July’s 3.5% reading.  Nonfarm Payrolls rose slightly more than expected as 187k jobs were added on the month.  Interestingly, the Labor Force Participation Rate ticked up slightly to 62.8% while Average Hourly Earnings rose by +0.2% MoM and +4.3% YoY.  The JOLTS Job Openings reading for July dipped below 9,000k, suggesting perhaps a cooling down in the pace of hiring.  However, weekly Continuing Claims remain range bound.

Inflationary pressures appear to be “under control”, although still at levels that may prevent the Fed from declaring victory.  Energy prices are surging, with oil approaching $100 per barrel, and housing prices appear sticky, even with substantially higher mortgage rates (now over 7%).  CPI for August came in at +0.6%, as expected, while Core CPI came in slightly higher than forecast at +0.3%.  Year over year, consumer prices are up +3.7%, while ex-food and energy, prices rose +4.3%.  Wholesale prices surged a higher than expected +0.7% in August, although remain just +1.6% higher YoY.  Lastly, the PCE Core Deflator edged up only +0.1% in August, and 3.9% YoY.

As referenced above, the new Fed Dot Plot suggests short-term interest rates will remain elevated throughout 2024.  They don’t expect substantial cuts to the Fed Funds Rate until 2025, although there remains a rather wide variance around projections.  Those hoping for a 2023 Q4 rate cut were surely disappointed, and with the 20-year Treasury bond yield poised to breach the 5% level, investors appear resigned to higher interest rates.  With two meetings left here in 2023, it’s unlikely the FOMC will hike rates further, but rather adopt a wait and see approach, surveying ongoing economic data for signs of weakness in the U.S. economy.

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