Signaling Ahead

With the economic recovery steady and inflation continuing to be elevated, Fed officials are still on track to raise interest rates in 2023, with tapering predicted by year’s end.

Download PDF

Key Points

  • As expected, the Federal Open Market Committee (FOMC) held the federal funds target rate range at 0% to 0.25%.
  • With the economic recovery holding steady and inflation elevated, the FOMC said it expects to taper bond purchases in the fourth quarter of 2021.
  • The committee members were split on expectations for a rate hike in 2022. The median committee member saw three to four rate hikes in 2023 and potentially an additional three more by the end of 2024.
  • Fed’s latest estimates show a decrease in gross domestic product (GDP) from 7% to 5.9% in 2021 with an increase in unemployment from 4.5% to 4.8%.
  • Inflation is now projected to be at 4.2% this year (almost a full percentage point more than just three months ago) before slipping back to 2.2% in 2022.

At their September meeting, Federal Open Market Committee (FOMC) members kept interest rates near zero and were split on the decision for a potential first-rate hike for 2022, according to the committee’s Dot Plots. While Fed Fund Futures were little changed from the start of the week with projections not reaching double digits until September 2022, there was significant movement in expectations (from 7.2% to 38.5%) for a December 2022 hike in the benchmark rate. The Fed raised its inflation projection to 4.2% from 3.4% by year end, almost a full percentage point higher than its estimate just three months ago, noting that the “supply bottlenecks in some sectors have limited how quickly production can respond in the near term” and “have been larger and longer lasting than anticipated and has led to upward revisions to inflation projections for this year.” So, while investors will likely need to revise their real return projections for 2021, the committee still believes that these inflation pressures will abate, and inflation is expected to slip back to the FOMC’s long-term goal.

Also, Fed officials significantly lowered estimates for GDP growth in 2021 from 7% to 5.9% and slightly bumped up unemployment numbers from 4.5% to 4.8%. The committee expects that the pandemic-related factors weighing on employment growth to wane in the coming months with more vaccinations. Still, Chairman Powell warned that “the recovery is still incomplete, and risks [from the pandemic] to the economic outlook still remain.”

Below are the language changes made in the Fed’s statement from July:

Here are the committee’s September projections for GDP, unemployment, inflation, and the federal funds rate for 2021:

The “Dot Plot” showed interest rates to remain at current levels for the rest of 2021. The committee did adjust its rate-hike projections for both 2022 and 2023. While nine of 18 committee members saw a rate hike in 2022, 17 expected rate increases in 2023. The median committee member saw three to four rate hikes in 2023 and a total of six or seven by the end of 2024. Three officials actually projected a fed funds rate between 1.5% and 1.75% in 2023.

After the Fed announcement, the 10-year Treasury ended the day lower by 1 basis points to 1.32%; short and long rates were mixed on the day:

In Conclusion

Markets closed the day higher on the final day of the FOMC meeting, albeit both the Dow Jones Industrial Average and S&P 500 lost some of the gains from earlier in the session during Chairman Powell’s press conference. The Dow Jones Industrial Average and S&P 500 finished the day up 1% and 0.95%, respectively, and the 10-year Treasury ended the day lower at 1.32% with corporate-debt sectors all up: 0.20% for investment-grade corporate bonds, 0.12% for high-yield bonds, and 0.03% for bank loans.

With rich asset valuations becoming an increasing concern as markets have been moving well in advance of economic data points and with some asset classes now trading at valuations reflecting a close to best-case recovery, the risk/reward balance is potentially becoming more unfavorably skewed in certain areas and sectors across both equity and fixed-income markets. As Fed officials reaffirmed their stance that policy will remain highly accommodative, and that the potential upcoming tapering of current purchases will be methodical, transparent, and communicated in advance, investors should consider the possibility for increased volatility, as markets try to interpret and anticipate the likely changes in policy regime. Continued monthly inflation of 4% to 5% might bring us to potentially unpleasant crossroads with ongoing concerns about the potential impacts of accelerating wage growth, dis-anchoring inflation expectations and erosion of purchasing power due to higher prices. Those scenarios could become headwinds that persist longer than some had expected and might continue to slow what has been an impressive recovery, causing some investors to recalibrate their expectations of what could become a Fed-lite recovery.


One basis point is equal to 0.01%.

Bank Loans are represented by the Credit Suisse Leveraged Loan Index, which is designed to mirror the investable universe of the U.S. senior secure credit (leveraged loan) market.

The Dow Jones Industrial Average index (DJIA) tracks the share price of the top 30 large, publicly-owned U.S. companies which is often used as an indicator of the overall condition of the U.S. stock market.

High-Yield bonds are represented by Bloomberg Barclays US Corporate High-Yield Index, which measures the USD-denominated, high-yield, fixed-rate corporate bond market.

Investment-grade corporate bonds are represented by Bloomberg Barclays U.S. Corporate Bond Index that measures the investment grade, fixed-rate, taxable corporate bond market.

The S&P 500 index is a market capitalization-weighted index of 500 widely held stocks often used as a proxy for the U.S. stock market.


This publication is provided by Pacific Funds. Pacific Funds refers to Pacific Funds Series Trust. The views of this commentary are as of September 22, 2021, are based on current market conditions, and are subject to change without notice. These views are presented for informational purposes only. These views should not be construed as investment advice, an endorsement of any security, mutual fund, sector, or index, the offer or sale of any investment, or to predict performance of any investment. Any forward-looking statements are not guaranteed. All materials are compiled from sources believed to be reliable, but accuracy cannot be guaranteed.

All investing involves risk, including the possible loss of the principal amount invested.

Pacific Life Insurance Company is the administrator for Pacific Funds. It is not a fiduciary and therefore does not give advice or make recommendations regarding insurance or investment products.

Pacific Funds are distributed by Pacific Select Distributors, LLC (member of FINRA & SIPC), a subsidiary of Pacific Life Insurance Company (Newport Beach, CA), and are available through licensed third parties. Pacific Funds refers to Pacific Funds Series Trust.

Continue Reading

Subscribe to receive industry news and insights


Please choose your role
Copyright 2020 © Pacific Life Insurance Company
Please Upgrade Your Browser.

Unfortunately, Internet Explorer is an outdated browser and we do not support it. To have the best browsing experience, please upgrade to Google Chrome, Firefox or Safari.