Written by: Brian Davies, Chief Investment Officer
The Federal Reserve raised the target fed funds interest rate again today with a 75-basis point move to a range of 3.00%-3.25%. Dialogue coming out of the meeting and press conference was like the short speech Jerome Powell gave last month at the Jackson Hole symposium; inflation is the #1 focus of this Fed. The one change highlighted in the press release was a downgrade in U.S. GDP growth for 2022. The Fed now expects GDP to come in at growth of only 0.2% this year vs. an estimate of 1.7% in June. Next year the estimate is for GDP growth to be well below trend potential at 1.2%. Inflation continues to win the day, and the fed will be laser focused on bringing inflation down to somewhere below 3.0%.
With two more meetings this year, it is expected the Fed will hike at each of the upcoming meetings in 2022. Currently the Fed Futures are pricing in another 75bps (3 25bps hikes) in November (meeting on November 2nd) and then another 50bps (2 25bps hikes) in the December meeting (meeting on December 14th). This would put the fed funds interest rate range at 4.25% – 4.50% by year end. Remember, that rate was zero at the start of the year. That would mean we would have seen an amazing 17 rate hikes (25bps each) in 2022. That fact is even more amazing when you consider that the markets were only expecting two hikes this year on January 1st. This has proven to be one of the fastest-tightening cycles on record.
Moving into 2023, the expectation today is the Fed will have more work to do. The current dot plot has the Fed Funds rate peaking between 4.50% and 5.0% in 2023. The inflation data for the rest of the year will have a major influence on how high the Fed will go. If inflation continues to slow from the peaks this spring, then one or two hikes early in 2023 may cap this cycle. However, if the inflation prints are persistently high, the hiking cycle will last well into 2023. Currently, the futures are pricing in the Fed pausing early in 2023 and taking a wait and see approach. As always, the data will be the determining factor on when this hiking cycle ends.
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