U.S. FOMC Meeting (September 20-21 , 2022)

FOMC hikes policy rate by 75 basis points, signals many more to come

• The Federal Reserve Open Market Committee (FOMC) lifted the federal funds rate to the 3.0% to 3.25% range and reaffirmed a continuation of its balance sheet runoff. 
• The Fed updated its language stating that "recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures." 
• The Fed's Summary of Economic Projections was updated from June:
  • The median projection for real GDP growth was downgraded in 2022 (0.2% from 1.7%). The forecast for 2023, 2024, 2025 and the longer run came in at 1.2%, 1.7%, 1.8%, and  1.8, respectively. 
  • The median unemployment rate forecast was 3.8% (3.7%) for 2022, 4.4% (3.9%) for 2023,  4.4% (4.1%) in 2024, and 4.3% in 2025. The longer-run estimate of the unemployment rate stayed the same at 4.0%.
  • On inflation, the median estimate for core PCE was assumed to be 4.5% in 2022, 3.1% in 2023, 2.3% in 2024, and 2.1% in 2025. 
  • The median projection for the fed funds rate was lifted to 4.4% in 2022, 4.6% in 2023, 3.9% in 2024, and 2.9% in 2025. The long-run neutral rate was assumed to be 2.5%.
• All of the members of the FOMC voted in favor of the decision.

Key Implications

• Another Fed meeting, another 75 basis point hike. Even though headline inflation has shown signs of peaking, underlying measures of core inflation have yet to turn decisively enough for the Fed to slow the pace of rate hikes. With Fed members now expecting that core inflation will remain above 3% through 2023, they have signaled even more hikes are on deck over the next few months and into 2023. This has Treasury yields rising, with the U.S. 2-year yield now having well eclipsed 4%.
• Today's statement echoes the hawkishness from Chair Powell's Jackson Hole speech, where he highlighted that the Fed wasn't going to back down from the inflation fight "until the job is done." This implies a willingness to bring rates into restrictive territory in order to break the current inflation cycle even if it means making a considerable sacrifice to economic growth. It is for this reason that we have recently downgraded our forecast for U.S. GDP growth over the remainder of this year and next as the economy struggles to adjust to the weight of rising rates and stubbornly high inflation.    

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