September 21st  FOMC Follow-Up

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  • The FOMC voted today to raise the Federal Funds rate to a range of 3.00 – 3.25%, a 75 basis point increase. This decision was unanimously supported by the 12-member rate-setting committee and was also in-line with market expectations.
  • The decision for a 75 bps hike followed four consecutive rate increases totaling 2.25% at previous meetings. A hotter than expected August inflation report as well as an “unconditional” commitment to fight inflation from Chairman Powell in his annual policy speech in Jackson Hole, Wyoming last month led investors to widely anticipate this 75 bps increase.
  • Equity markets declined in light of today’s rate hike with the S&P 500 closing 1.7% lower on the day. The 2-year Treasury yield moved higher following the decision, hitting a level not seen since October 2007, while the 10-year Treasury yield ended the day slightly lower.
  • Chairman Powell commented that the current rate level is “at the very lowest level of what is restrictive.” This followed July comments that rates would need to reach at least a “moderately restrictive” level and remain there for some time.
  • Revised interest rate projections are somewhat more aggressive than many in the market expected. Projections now show that all participating Fed officials expect rates to increase to at least 3.75% by the end of the year, with median projections calling for another 125 bps of rate increases. This is up 100 bps from the previous year-end projection following June’s meeting and up 250 bps from the March projection. Median projections for 2023 and 2024 also moved up, reflecting the Fed’s “higher for longer” guidance.

Economic Projections

  • The Fed’s updated statement suggested a view that the US economy continues to grow, indicating continued comfort with rate increases. The new statement contained only one change, noting that economic indicators “point to modest growth in spending and production.” This is a change from “recent indicators of spending and production have softened.”
  • Chairman Powell fell short of forecasting a recession in his post-meeting comments but did concede a high likelihood of below trend growth and a softening of the labor market, pain which he considers preferable to high inflation becoming entrenched.
  • The revised economic projections acknowledge an expected slowdown. 2022 – 2024 annual GDP growth estimates were revised downwards relative to June, with the most notable being 2022’s year-end figure moving from 1.7% down to 0.2%. Growth in 2023 and 2024 is also projected to be “below trend” at 1.2% and 1.7%, respectively. Correspondingly, the 2022 – 2024 unemployment rate projections were all revised upwards relative to June. Inflation projections were modestly higher.

The FOMC is next scheduled to meet Nov 1 – 2, 2022


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