June 15th FOMC Follow-Up

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Rates

  • The FOMC voted yesterday to raise the Federal Funds rate to 1.50 – 1.75%, a 75 basis point increase. This was a 10-1 decision as Kansas City Fed President, Esther George, dissented in favor of a 50 basis point move. The last time the Fed raised rates by 75 basis points was in 1994.
  • Following the May meeting, Fed Chairman Powell had indicated that the FOMC was not actively considering a 75 basis point hike. Futures rates had implied a second consecutive 50 basis point hike until Friday, June 10th when the May CPI data was released showing a continued increase in the inflation rate. This rapidly shifted market consensus to 75 basis points prior to today’s vote.
  • Chairman Powell commented that although he does not expect 75 basis point rate moves to be common, either a 50 or 75 basis point increase at the July meeting is likely.
  • Futures markets reflect this sentiment with a 28% probability of a 50 basis point hike in July and a 72% chance of a 75 basis points hike.
  • Revised projections now show that all participating Fed officials expect rates to increase to 3% by the end of the year. The median projection is now 3.4%, up 150 basis points from the 1.9% year-end rate projection following the March meeting. The longer run rate expectation increased slightly from 2.4% to 2.5%.

Economic Conditions

  • Powell commented that a soft landing is not getting easier due to many factors out of the Fed’s control. The invasion of Ukraine by Russia is boosting prices for gasoline and food while other supply chain constraints are applying price pressure to a broad range of goods and services amidst strong aggregate demand.
  • The FOMC’s median PCE inflation estimate for this year was increased to 5.2%, up from 4.3% in March. PCE is projected to moderate to 2.2% by 2024. This remains above the 2.0% long term target the Fed is committed to achieving.
  • Revised economic projections suggest a short-term slowdown based on two economic indicators. 2022 – 2024 annual GDP growth estimates were revised downwards relative to March. The 2022 – 2024 unemployment rate projections were revised upwards relative to March. However, the longer run estimate of both figures, 1.8% GDP growth and 4.0% unemployment, were left unchanged.

The FOMC is next scheduled to meet July 26-27, 2022

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