The FOMC voted unanimously to leave the target range for the fed funds rate unchanged at 5.25-5.50%. That was expected and not what market participants were focused on with respect to the September FOMC meeting. What they were focused on was the Summary of Economic Projections (SEP), the dot plot, and Fed Chair Powell's press conference.

The takeaway from the SEP was twofold: (1) Policy rates are anticipated to remain higher for longer and (2) Fed officials are not expecting to cut rates in 2024 as much as they were anticipating when they updated their forecasts in June.

The median fed funds rate estimate for 2023 was unchanged at 5.6%, but the median estimate for 2024 was 5.1%, versus 4.6% in June. The former estimate suggests officials are still leaning in favor of one more rate hike this year, whereas the latter revision connotes an expectation that rates will come down by only 50 basis points in 2024, as opposed to 100 basis points when estimates were provided in June.

The median fed funds rate estimate for 2025 was 3.9% versus 3.4% in June, and a median estimate of 2.9% was introduced for 2026. The longer-run fed funds rate estimate was maintained at 2.5%, leaving one to infer that the Fed is going to stay committed to its 2.0% inflation target.

To that end, the Fed isnot thinking rate cuts. Rather, the Fed is thinking more along the lines of how many additional rate hikes might be needed, and if the answer is none, how long they should stay at a restrictive level to ensure inflation is going to come back down to 2.0% on a sustainable basis.

This is the essence of what Fed Chair Powell meant when he said several times the Fed is going to "proceed carefully" when thinking about making a policy move.

The Fed respects the history of lag effects when it comes to tightening cycles, yet it also appreciates that structural factors could be making this cycle different in terms of the timing of the transmission effect.

The Fed admittedly has been struck by the enduring strength of the economy, but with signs of loosening starting to appear in the labor market, and evidence building that low to middle-income consumers in particular are suffering from the weight of inflation, it wants to walk a careful line at this point with its policy decisions; however, a strong economy threatens to keep inflation at elevated levels that disproportionately hurt low to middle-income households, so if it takes higher rates to get inflation down to its 2.0% target on a sustainable basis, then the Fed will walk that line.

Notably, Fed Chair Powell acknowledged that it is plausible that the neutral rate is higher than the longer-run rate, which he said is part of the explanation for why the economy has been more resilient than expected.

If the economy comes in stronger than expected, he said, that just means the Fed will have to do more in terms of monetary policy to get back to 2%, "because we will get back to 2%."

That is a testament to what can still be characterized as a hawkish stance by the Fed considering core inflation remains above 4%. Accordingly, the issue for the market isn't that the Fed is hawkish. The issue is that the Fed is still not sounding any convincing dovish cues when it comes to setting the policy rate.