Lighting the way
With sharp increases in rates and projections, the Fed intends to guide the markets.
Never thought we'd see the day when a 75 basis-point rate hike was not the headline event of a Federal Open Market Committee meeting. That was exactly the case today, as the Federal Reserve brought forth another supersized increase, yet the supplemental information took center stage.
Chair Jerome Powell said the Fed hopes to “light the way” to price stability and the Summary of Economic Projections (SEP) gives us a good look inside policymakers’ minds.
The new dot plot revealed a median fed funds rate projection of 4.4% for the end of 2022—1% more tightening than officials had forecast in June. That implies a target range of 4.25-4.50%. With the range now 3-3.25%, rates need to climb another 1.25% over the FOMC meetings in November and December. And that’s not all: the 2023 median dot implies a peak rate of at least 4.6%, before it falls to 3.9% by year-end 2024 and 2.9% at the end of 2025 (the first time we have a look at that year). We’ve said it before about the Fed actions but it bears repeating loudly today—it’s faster, higher, longer from the Fed.
The SEP also reflected economic pain ahead, with GDP estimates of 0.2% for 2022, 1.2% for 2023 and less than 2% for the following two years. The unemployment-rate is projected to rise to 4.4% by year- end 2023, where it is forecast to sit for the following three years. This may be wishful thinking on the Fed’s part. Finally, the Fed projects it will prevail in the battle against inflation with these aggressive policy actions, as projections of core PCE inflation hit 4.5% by year-end 2022 but then decline to 3.1% in 2023 and 2.3% in 2024. Recall that monetary policy works with a lag and inflation is a lagging indicator, so it may take some time for even today’s assertive steps to take hold.
The Fed confirmed it will continue to reduce its balance sheet at the speed of $95 billion per month. Although there had been some speculation to the contrary ahead of the meeting, administered rate relationships were unchanged—increasing each by 75 basis points to 3.05% for the New York Fed Reverse Repo Facility (RRP) and 3.15% for Interest on Reserves—and the maximum amount per counterparty for the Fed RRP remained at $160 billion.