The Fed Goes Big

By: Henri Proutt, Jeff Weaver

On Wednesday, June 15, the Federal Open Market Committee (FOMC) raised the federal funds rate by 75 basis points (bps; 100 bps equal 1.00%) to a new range of 1.50%‒1.75% by a vote of 10-1—an outcome that was very far from consensus as recently as Friday, June 10. The 8.6% year-over-year Consumer Price Index data point released on June 10 was concerning enough that the Wall Street Journal credibly reported on June 13 that Federal Reserve (Fed) officials were rumored to be considering accelerating the pace of tightening. Investors believed the basis for the Wall Street Journal article was a purposeful leak by Fed leadership to prepare the market for Wednesday’s policy decision. The market brought forward expectations of a 75-bp increase for both the June 15 and July 27 FOMC meetings. The University of Michigan: Inflation Expectation for long-term inflation increased to 3.3% from 3.0% on June 10, its highest level since 2008, and was rumored to be equally concerning to the Fed.

Along with the rate hike, the Fed released a new Summary of Economic Projections (SEP) showing that members of the committee believe the fed funds rate will end 2022 at 3.4% and 2023 at 3.8%. Both of these are significant increases from the March 16 SEP when the median fed funds rates at the end of years 2022 and 2023 were expected to be 1.9% and 2.8%, respectively. Also, it’s now expected that inflation will remain higher for longer and growth will slow. The Fed estimates that inflation, as measured by the Personal Consumption Expenditures Index, is likely to end 2022 at 5.2%, an increase from its March median estimate of 4.3%. The gross domestic product forecast fell to 1.7% from 2.8%, and the unemployment rate was forecast to rise to 3.7% at the end of 2022, up from the March projection of 3.5%.

During the press conference, Fed Chair Jerome Powell stressed the need to increase the fed funds rate beyond neutral (he stated “mid-twos”) to combat inflation and inflation expectations. When asked about his role in leaking the Fed’s intentions to the Wall Street Journal, Chair Powell avoided the question, noting that the Consumer Price Index and inflation expectations reported on June 10 warranted a larger rate hike than had previously been communicated. Later in the press conference, Chair Powell again leaned on inflation expectations, calling them “eye popping,” and he noted that the Fed is “absolutely committed” to keeping long-term inflation expectations anchored at 2.0%. As for the rate decision at the next FOMC meeting on July 27, Chair Powell gave himself some flexibility to react to the data that gets released over the next six weeks but noted that a 50- or 75-bp hike is likely.

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Originally Posted June 16, 2022 –The Fed Goes Big

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