Federal Reserve hikes rates another 75 basis points
This week, the Federal Reserve raised rates by 75 basis points, in line with market expectations. Its target range for overnight rates is now 2.25–2.5%, which is near its estimate of the longer-run neutral rate.
With the FOMC statement not containing any significant surprises, it was up to Fed Chair Jerome Powell to communicate their intentions for further policy moves.
Given that the latest inflation print showed headline CPI at a new 40year high of 9.1%, it is not surprising that Powell reiterated the Fed’s strong commitment to bringing inflation down. He said that the Fed has the tools they need and the resolve to use them. There were, however, some comments that markets are in- terpreting as dovish, or at least not as hawkish as they could have been. Both equity and bond markets rallied as Powell spoke.
While repeatedly stating that future Fed policy will depend on how the data evolves, Powell hinted that there would likely be at most one more very large rate hike. He referenced the dot plot from the previous meeting in June, which, for the end of 2022, showed rates around 100 basis points above where they are now. Given that there are three meetings left this year, the Fed could, for example, hike by 50bps, 25bps, and 25bps to hit that level. This would be in line with our view going into today’s meeting. Powell seems to be saying that even after the recent higher-than-expected inflation data, the FOMC’s view on how much further they need to hike rates hasn’t changed very much.
Further, relative to his recent appearances, Powell’s interpretation of recent economic developments was noticeably more downbeat. With the initial estimate of 2Q GDP out tomorrow, he suggested that the weak or negative growth number most forecasters are expecting reflects a genuine slowing of demand rather than a statistical quirk. At the same time, it is important to keep in mind that the Fed still sees the labor market as too strong, and they want to see a better supplydemThaenFdOMbaCl'asnvcieewfonr labor, with fewer job openings relative to the important data point since slower wage growth number of unemployed workers available to will be needed to get inflation down to their
Fed hikes another fill them. 2% target. He also noted that there are eight
He noted that the Employment Cost Index weeks before the next FOMC meeting, and for 2Q, which is due out on Friday, would be an over that period we will get two more months
of data on inflation and the labor market. This data and financial market developments will
75 basis point largely determine how much the Fed hikes in September.