Nicholas A. Juhle, CFA®

Chief Investment Officer

Fed Hikes Another 0.75%; Year End Target to 4.25%-4.50%

Side by Side Statement Comparison: Attachment: https://file.ac/3J4OO5c0VOs/

Fed raises interest rates by another 0.75% as inflation remains too high. The policy range is now 3.00%-3.25%. The Fed projects 5 more 2022 hikes and a year-end target rate of 4.25%-4.50%. The Fed projects 1 hike in 2023 before easing in 2024.

At its meeting today the FOMC voted unanimously to raise the Federal Funds rate to 3.00-3.25%.

The statement noted that job gains have been robust and that recent indicators point to modest growth in spending and production.

In its summary of economic projections, the Fed updated their projections to show slower real GDP growth, faster 2022 & 2023 inflation, and higher policy rates.

In addition, the 2023 forecast show Core PCE Inflation exceeding headline PCE inflation, reflecting inflation broadening into stickier areas of the economy.

The projections also show an increase in the unemployment rate in both 2022 & 2023.
Participants uniformly assessed uncertainty about projections for GDP growth to be ‘Higher’ and nearly-uniformly noted risks to GDP growth to be weighted to the downside & risks to unemployment & inflation weighted to the upside.

The Summary of Economic Projections included increases to the median Fed Funds Target Rate forecast:
By year-end 2022: from 3.4% to 4.4%

By year-end 2023: from 3.8% to 4.6%

Variable  
  2022 2023 2024 2025 Longer Run
Change in real GDP 0.2 1.2 1.7 1.8 1.8
June projection  1.7 1.7 1.9   1.8
March projection 2.8 2.2 2.0   1.8
December projection 4.0 2.2 2.0   1.8
Unemployment rate 3.8 4.4 4.4 4.3 4.0
June projection 3.7 3.9 4.1   4.0
March projection 3.5 3.5 3.6   4.0
December projection 3.5 3.5 3.5   4.0
PCE inflation 5.4 2.8 2.3 2.0 2.0
June projection 5.2 2.6 2.2   2.0
March projection 4.3 2.7 2.3   2.0
December projection 2.6 2.3 2.1   2.0
Core PCE inflation 4.5 3.1 2.3 2.1  
June projection 4.3 2.7 2.3    
March projection 4.3 2.7 2.3    
December projection 2.7 2.3 2.1    
Fed funds rate 4.4 4.6 3.9 2.9 2.5
June projection  3.4 3.8 3.4   2.5
March projection 1.9 2.8 2.8   2.4
December projection 0.9 1.6 2.1   2.5

2022 Year End Dot Plot Evolution:

1

2023 Year End Dot Plot Evolution:


Messaging at the press conference:

Powell noted the Federal Reserve’s commitment to returning inflation to the longer-run 2% target.

He noted that at some point slowing the pace of rate hikes may be appropriate to assess the cumulative affect of rate hikes.

Powell noted that going through a period of below-trend growth and weaker labor markets may be required to return inflation to the 2% objective.
At Q&A Powell noted that the FOMC has just moved into the lower-end of restrictive territory and that there may be a way to go.

Market reaction:
The market opened higher today, plunged upon the release of the statement, and then rallied significantly during the press conference.

Bond yields popped higher upon the release of the statement, and then fell significantly during the press conference.
The dollar rallied and then fell during the press conference, gold rallied, and oil was mostly flat.

 

  Prev. Close Open 2pm 2:45pm   % change Prev Close % change Open % change 2pm-2:45pm
S&P 500 $    3,855.93  $    3,871.40  $          3,848.90  $           3,903.64   1.24% 0.83% 1.42%
Dow Jones Industrial Average $  30,706.23  $  30,819.39  $        30,616.01  $         30,992.36   0.93% 0.56% 1.23%
Nasdaq $  11,425.05  $  11,466.21  $        11,394.65  $         11,602.99   1.56% 1.19% 1.83%
10 Year Treasury Rate (%) 3.56%  3.56% 3.60% 3.53%   -0.03% -0.03% -0.07%
US Dollar $        110.22  $        110.17  $              111.41  $               110.80   0.53% 0.57% -0.55%
Gold $    1,664.89  $    1,664.89  $          1,661.34  $           1,685.65   1.25% 1.25% 1.46%
Oil $          83.94  $          84.25  $                83.79  $                 83.80   -0.17% -0.53% 0.01%

Our takeaways:
Rates have been rising in recent weeks in anticipation of this action. The 2 year treasury rate topped 4% for the first time since the 2008 financial crisis.

Bond market pricing & the FOMC are aligned for the remainder of 2022 and mostly aligned in 2023.
The Fed is committed to taking policy to restrictive territory until there is meaningful downward pressure on inflation.

We will need to continue to assess the impact of these rate hikes on the economy. Higher rates are already weighing heavily on housing activity in the US. Chair Powell mentioned that achieving a soft landing may be difficult.

The resilient labor market is giving the FOMC the impetus to continue hiking. The rubber will meet the road if labor market conditions begin to deteriorate.
Overall, this meeting was consistent with market expectations and we are seeing a bit of a relief rally in risk assets.