Quarterly Economic Projections

Here is what hurt the market as soon as it was released. As far as year-end 2024 GDP is concerned, the FOMC's median expectation moved all the way up to growth of 2.5% from just 2% in September. In taking the committee's expectations for economic growth significantly higher, the committee also took their year-end median expectation for the unemployment rate down to 4.2% from 4.4% in September, while taking PCE inflation up to 2.4% from 2.3%, and Core PCE up to 2.8% from 2.6%.

Basically, the Fed now sees more economic activity, increased inflation and less unemployment than they as a group had anticipated just three months ago. After considering all of that, the FOMC left their year-end projection for the fed funds rate at 4.4%, where it had been in February and where they essentially took that target (4.25% to 4.5%) for that rate today. None of that really took financial markets by surprise. What did hit financial markets on Wednesday afternoon was the FOMC's median projection for the fed funds rate at year's end 2025, in twelve months. The FOMC took that expectation up to 3.9% from 3.4%. To put it bluntly, the FOMC cut their 2025 expectations from four 25-basis point rate cuts down to just two 25-basis point rate cuts.

While the FOMC was taking their 2025 interest rate projections higher, they also took their projections for 2025 PCE higher.... 2.1% to 2.5% at the headline level and 2.2% to 2.5% at the core. Unemployment for 2025 was taken slightly lower while FDP for 2025 was taken slightly higher. The fact is that the Fed is likely thinking that they can no longer continue for very long to ignore the inflation side of their dual mandate as inflation has clearly reaccelerated into year's end 2024.

Additionally, and probably much to the chagrin of many equity investors, the FOMC also took the group's median projections for the fed funds rate at year's end 2026, 2027 and for the longer run higher, suggesting that at no time the perceived loss of two rate cuts in 2025 will be made up at a later date.