The Federal Open Market Committee opted not to raise its interest rate target at its September 20 meeting. The range for the federal funds rate remains 5.25-5.50 percent. However, several Fed officials hinted another hike could come later in the year. Do we need tighter monetary policy?

The FOMC also released its latest Summary of Economic Projections (SEP) on Wednesday. This contains estimates about the future path of GDP growth, unemployment, and inflation. The last of these is particularly important for ascertaining the stance of monetary policy.

Median estimates for the annual growth rate in the Personal Consumption Expenditures (PCE) index for 2023 were 3.3 percent headline and 3.7 percent core (excluding food and energy prices). The June estimates were 3.2 percent and 3.9 percent, respectively. The slight uptick in headline inflation forecasts is likely due to unexpectedly high energy prices.

Recall that the real (i.e., inflation-adjusted) federal funds rate is equal to the nominal federal funds rate minus expected inflation. Hence, we can use the Fed’s inflation projections to estimate the real federal funds rate. The headline inflation projection implies a real federal funds rate range of 1.95 to 2.20 percent. The core inflation projection implies it is between 1.55 and 1.80 percent.