High inflation shattered the Fed’s consensus


One of the things that went largely unnoticed about yesterday’s Federal Open Market Committee (FOMC) was the lack of consensus on the medium-term future.

Fed officials are in very good agreement on the path of the federal funds rate this year and next, according to the dot chart in the Summary of Economic Projections (SEP). Eight of the FOMC participants see the target range between 4 and 4.25%, and nine see the range between 4.25 and 4.50%. One outlier sees it a quarter point higher and another a quarter point lower.

There are three levels that are getting a lot of support for the end of 2023 projection. There are six FOMC participants forecasting a 4.25-4.50% range, six seeing 4.50-4.75 and six who see 4.75 to 5.00%. An outlier sees the target range between 3.75 and 4%. The thing is, the Fed’s projections are pretty tightly clustered around three positions that are themselves close to each other.

Now look to 2024. There is no consensus at all. There are two officials each for each of three quarter-point increases between 4.75 and 4.50 percent and 4.25 and four. There are four for 3.75 to four percent. Three each for the next two quarter point increases below. At the bottom, there is one participant for each of the three quarter-point increases from 3.25 at 3% to 2.75 at 2.5%. Projections, in other words, are everywhere.

It’s not always the case. In the previous SEP, released in June, there were eight forecasts in the 3.35% to 3.50% range. There were still outliers above and below, but it was clear there was a centrist view. Now there really isn’t. The most popular view in the September meeting – 3.75 to 4% – attracts half as many participants as the most popular view in June.

To put it a little differently, in June there were half as many falcons with projections above the most popular view. There were six doves under the most popular view. Now hawks and doves outnumber the center in both directions.

It’s no wonder Fed Chairman Jerome Powell has continually emphasized how uncertain the future is. As he said on Wednesday, “These projections do not represent a decision or plan by the Committee, and no one knows for sure where the economy will be in a year or more.”



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