FOMC KEY POINTS:
- The FOMC comes out all guns blazing and raises the federal funds rate by 75 basis points to 1.50-1.75%, delivering the biggest single meeting hike since 1994
- The policy statement acknowledges that officials are highly attentive to inflation risks
- Policymakers signal the benchmark rate will end 2022 at 3.4%, up from 1.9% forecast in March, implying 150 bp of additional tightening over the remaining four meetings of the year
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UPDATED AT 2:40 PM EDT MARKET REACION
U.S. Treasury rates briefly moved up after the FOMC embraced a steeper path for interest rate increases, but then reverted lower during Powell’s press conference after he indicated that he doesn’t expect 75 basis points hikes to become common. The pullback in yields pushed the S&P 500 and Nasdaq 100 to session’s highs. Nasdaq 100 futures, for example, surged as much as 3% during these comments.
PUBLISHED WED, JUN 15 2022 2:15 PM EDT
The Fed did something today that it has not dared or needed to do since 1994 in a single meeting: it raised borrowing costs by 75 basis points, bringing the federal funds rate to 1.5%-1.75% – aligning the decision with market forecasts. Today’s forceful hike, the third during the ongoing tightening cycle, should be taken as a clear indication that the FOMC is getting very nervous about blistering price pressures in the economy and is desperate to regain control of the narrative after being criticized for falling behind the curve by waiting too long to start removing accommodation.
Until last week, Wall Street had anticipated a half-point adjustment identical to the one delivered last month and in line with central bank guidance, but expectations for a larger move firmed in recent days after May’s U.S. CPI blew past market estimates, soaring 8.6% y-o-y, its highest level since 1981, squashing hopes that inflation has peaked.
Wednesday’s 75 bp increase, which runs counter to previous communications, is likely to boost policy uncertainty and create confusion about how the institution reacts to new information by suggesting officials are losing confidence in their own forecasts. All of this raises the possibility that the FOMC could deviate from prior guidance in the future at the drop of a hat if inflation figures continue to surprise to the upside, a situation that could fuel further volatility around the release of key economic reports.
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The FOMC communique took a constructive view on the economy, recognizing that activity appears to have picked up after edging down in the first quarter and that the labor market remains strong. On inflation, the FOMC indicated that the invasion of Ukraine and related events are creating upward pressure on prices, complicating the growth outlook. The communique also noted that officials are attentive to inflation risks. With respect to monetary policy, the statement language didn’t change much, reiterating that the committee anticipates that ongoing increases in the target range will be appropriate. This time the bank raised rates by 75 bps, so these comments may signal additional 75 bp hikes in the future.
Source: Federal Reserve
SUMMARY OF ECONOMIC PROJECTIONS
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GDP AND UNEMPLOYMENT
The Fed downgraded its gross domestic product for the entire forecast horizon, reinforcing fears that economic activity is rapidly decelerating amid mounting risks to the outlook, including tighter monetary policy. That said, 2022, 2023 and 2024 GDP projections were cut to 1.7%, 1.7% and 1.9%, respectively, down from 2.8%, 2.2% and 2.0% in the March assumptions.
For unemployment, this year’s estimate was raised to 3.7% from 3.5%. For 2022 and 2023, the metric was revised upwards to 3.9% and 4.1% from 3.5% and 3.6% correspondingly, an acknowledgement that the labor market is on track to weaken in a context of slowing growth.
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Core PCE, the Fed’s favorite inflation gauge, was marked up higher for the next two years. Looking at the details, the 2022 forecast was raised to 4.3% from 4.1% three months ago. For next year, the index is seen at 2.7% from 2.6% previously. Finally, the core CPI was left unchanged at 2.3% for 2024, indicating that inflation will stay above the U.S. central bank’s 2% target for several years.
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For 2022, the median dot shifted upwards to 3.4% from 1.9% in March, implying 150 basis points of additional tightening over the four remaining meetings of the year and that the monetary policy will have to turn restrictive to crush inflation and ensure expectations do not become unmoored. Restrictive rates at a time of rapidly slowing activity will become an additional drag on economic growth, raising the probability of a recession in the medium term.
For 2023 and 2024, officials penciled in a benchmark rate of 3.8% and 3.4% respectively. That compares with 2.8% and 2.8% in the previous quarterly forecast. Meanwhile, the longer run interest rate estimate was increased by one tenth of a percernt to 2.5%
The hawkish outlook for monetary policy will complicate the Fed’s job to steer the economy towards a soft landing, creating a challenging backdrop for stocks. If GDP downshifts aggressively, U.S. companies may soon begin issuing negative profit guidance and slash EPS expectations ahead of the second quarter earnings season, generating another headwind for risk assets.
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—Written by Diego Colman, Market Strategist for DailyFX