Fed rate decision: Recession fears have 'really faded,' professor says

Fed regulators have come out of the September FOMC meeting deciding to keep interest rates unchanged, potentially leaving the door open for one more rate hike in 2023. Dartmouth College Economics Professor Andrew Levin and abrdn U.S. Research Economist Abigail Watt sit down with Yahoo Finance Live to react to the Fed's interest rate narrative and what it may signal for 2024.

"The extent to which their statement today used the word 'solid' to describe economic activity is a good word," Levin, a former special adviser to the Federal Reserve Board, says. "So one thing the Fed is reluctant to do is to talk about risks, and I think the truth is there's an upside risk to the inflation outlook."

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Video transcript

- Let's bring in our next-- or our panel for much more on the Fed decision today. We've got former Fed Special Advisor, Andrew Levin. Also with us, we've got Abigail Watt, Aberdeen Research Economist. Great to have both of you today. Abigail, let me just start with you and get your take on what we heard from the Fed so far.

ABIGAIL WATT: Yeah, I think it's really interesting. I think we were expecting the final hike to remain in the dots for this year. I perhaps think where we've maybe underestimated the changes was in that-- I guess, 50 basis-point move up in for 2025.

I think that really signals to-- I mean 2024. I think that really signals to the market this higher-for-longer narrative. And I think this is the line that the Fed is trying to walk between this-- perhaps a undue loosening in financial conditions too soon. And I think that's something that Powell is really going to have to try and walk the balance on in the Presser later today.

- Andrew, interested to get your take as well, just what you made of the Fed news here, what they did, what they said, and what do you see going forward?

ANDREW LEVIN: Yeah, well, I agree with Abigail, actually. I think that the shift upward in the medium term dot plot is actually really important. And I think that the extent to which their statement today-- the use of the word solid to describe economic activity is a good word.

The fears that people had six months ago that we were heading into recession, I think have really faded. So one thing the Fed is reluctant to do is to talk about risks. And I think that the truth is there's an upside risk to the inflation outlook, their outlook in the projections [INAUDIBLE].

Though still very rosy, they expect that by the end of next year, inflation is going to be down around two and half, close to their target. But we can think of lots of scenarios where inflation is still running at 4% or 5%.

And then, a question I guess I'm eager to hear from Abigail what she thinks about this-- is the Fed going to need to do more in that scenario, where over the next six to nine months inflation is not stabilizing near their target the way that they were hoping?