Changes to the "forward guidance" of the Fed policy projections put "risk" back into investing. Before the September 19-20 FOMC meeting, policymakers' rhetoric of "higher-for-longer" and the projected policy rate path were inconsistent and conflicting. Policymakers talked tough, hinting they would keep rates high until inflation slowed. However, their policy forecast one more rate hike in 2023 and four cuts in 2024, even with inflation projected to be running above target, leaned heavily towards the dovish side.
Yet, now the Fed is painting a more balanced rate outlook, with the possibility of one rate hike in 2023 and only two cuts toward the end of 2024. That change triggered a sharp and sudden swing in the risk appetite of investors (who leaned towards the dovish/bullish side) and, in the process, sent bond yields to their highest levels since 2007. And the risk is still upward on official rates as policy forecasts creep higher and higher.
At the start of the year, the range of fed funds projections for 2023 was 4.9% to 5.6% and 3.1% to 5.6% for 2024. In June, the updated forecasts were 5.1 to 6.1 (2023) and 3.6 to 5.9 (2024). The 2023 range now is more narrow, 5.4 to 5.6, which makes sense, with only two meetings remaining for the year, while 2024 is 4.4 to 6.1. The bottom and the top of the 2024 fed funds forecasts keep increasing as policymakers confront an economy that has not slowed as expected, the labor market remains tight, and inflation runs well ahead of target.
One policymaker thinks a 6% fed funds rate is in store for 2024. At this time, the markets believe the odds of that are low, but the history "bookie" says it is higher than what many think.