Another big swing
The Fed raises interest rates by 0.75% for the second month in a row.
With inflation running at a 40-year high, the Federal Reserve continues to have no choice but to aggressively tighten monetary policy or risk damaging its hard-won inflation fighting credibility. Today it took another large swing with a 0.75% hike, as the Federal Open Market Committee unanimously voted to lift the fed funds rate to a target range of 2.25-2.50%. This marks two consecutive meetings with such an “unusually large increase,” in the words of Chair Jerome Powell.
Although today’s hike was well-telegraphed, Powell noted in the press conference that in the future the Fed would offer “less clear forward guidance,” since the Fed’s reaction function would be less forecast-oriented and more data dependent. He said it would “likely be appropriate to slow increases at some point.” But he stressed that no decision had been made on the timing of a deceleration in rate hikes—let alone a pivot to cutting rates as the market anticipates will happen next year.
Powell also said the fed funds rate is in “the range of what we think is neutral,” meaning the level at which inflation and economic growth are stable (and consistent with the Fed’s dual mandates of low inflation and full employment). But he acknowledged it would need to move higher, into restrictive territory, in order to get inflation back to the 2% target. While the statement from the meeting was similar to the last, it was good to see it acknowledge that rising food prices are among the growing list of factors keeping inflation elevated.
Risk assets initially responded positively, with stocks rallying, bond yields falling and credit spreads richening. This occurred despite the fact that Powell admitted that economic growth would likely slow and the labor market soften in response to the Fed’s tightening of monetary policy. But he stopped short of predicting a recession, continuing to emphasis that a narrow path still exists to pull off a soft landing. Risk assets appear to be confident that the Fed will be able to get inflation under control without tanking the economy. The Fed continues to reduce the size of its balance sheet in a further effort to restrain aggregate demand and cool off inflation, a process expected to take at least another two years to reach equilibrium.
Powell will have further opportunities to shape market expectations of policy in the coming weeks, notably at the Fed’s annual symposium in Jackson Hole, Wyo., in late August.