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By the end of 2022, the Fed may raise rates by another 125 basis points.

Reaction to the FOMC meeting

Even looking to the end of this year, Fed members are still predicting a 125 basis point rate hike…

As we noted in our preview of the FOMC meeting, the market has always been skeptical that Jerome Powell and company would go for a full 100 basis point (1.00%) rate hike, and as we have just seen, this skepticism was justified. : The Fed decided to raise interest rates by 75 basis points (0.75%) in the range of 3.00 to 3.25%, as we broadly expected.

While there are no big surprises, there is still plenty to discuss from the FOMC meeting through the Monetary Policy Statement, Economic Outlook Summary (SEP) and Jerome Powell’s press conference, which is coming to an end at press time.

Monetary Policy Statement

Overall, the monetary policy statement at this meeting saw the least change from the previous month’s statement in recent memory. The only illiterate change/re-evaluation for the market was the recognition that recent spending and production forecasts “indicate modest growth” (compared to the “decline” last month).

Needless to say, this minor change did not have much of an impact on the market, although it is worth mentioning what was not in the statement: no sign of an upcoming “reversal” or even pause by the US central bank.

Fortunately, there were some interesting developments in the accompanying roundup of economic forecasts, including the infamous “scatter plot” of interest rate forecasts…

Summary of economic forecasts

There have been a number of major updates to economic forecasts and central bank interest rates:

  • The average real GDP growth forecast has been revised up to 2022 (1.7% -> 0.2%), 2023 (1.7% -> 1.2%) and 2024 (1.98% -> 1.7%.
  • The projected average unemployment rate has been revised up by 0.1%, 0.5% and 0.3% in 2022, 2023 and 2024.
  • The projected average PCE inflation and core PCE have also been revised upwards for 2022 and 2023.

Overall, the changes in the Fed’s economic outlook suggest slower growth, higher unemployment and higher-than-expected inflation, which is a troubling if not unexpected update to the central bank’s economic outlook for the past two years.

Source: Federal Reserve System.

Likely in response to higher inflationary expectations, Fed interest rate expectations have also been revised upward across the board in 2022 (3.4% -> 4.4%), 2023 (3.8% -> 4 .6%) and 2024 (3.4% -> 3.9%). As we noted in the monetary policy statement above, the Fed’s own interest rate outlook shows no sign of a reversal to cut rates until 2024, signaling the central bank’s determination to fight price pressures at all costs.

Even looking to the end of this year, Fed members still expect a 125 basis point rate hike, likely 75 basis points in November and 50 basis points in December.

Press conference by President Powell

Chairman Powell is still talking as we go to the press, but with most of his comments behind him, Fed Chairman Powell looks a little less hawkish than the central bank’s statement and economic outlook. Below are highlights from Powell’s press conference. [c’est moi qui souligne] :

  • Fed WANTS TO RETURN TO ‘FAIRLY RESTRICTIONAL’ RATES
  • INCREASING THE RATE ON INPUT DATA
  • HISTORICAL PRECAUTIONS AGAINST PREMATURE RATE REDUCTION
  • MAYBE EASIER CONDITIONS ON THE LABOR MARKET
  • THE LABOR MARKET IS LIKELY TO BE SLOWDOWN
  • MAY DELAY THE PACE OF HIKING UNTIL A CERTAIN POINT TO EVALUATE THE EFFECTS
  • POWELL REPORTS FOMC WILL SHARE FROM 100 BPS AND 125 BPS FOR THE REST OF THE YEAR
  • THE AMOUNT OF PAIN DEPENDS ON THE TARGET TIME 2% INFLATION
  • THE HOUSING MARKET MAY LIKE A CORRECTION

While initial comments about a likely weakening in the labor market implied that the Fed was ready to drag the US economy into recession if necessary, its more recent comments about a potential slowdown in rate hikes and the possibility of “just” 100 basis points more on a hike. interest rates this year softened his hawkish tone a bit.

Market reaction

Seemingly repeating every second Fed meeting this year, the market first reacted to the seemingly hawkish statement and economic outlook (stocks and other risky assets are down, the US dollar and yields are up), before completely reversing this decision on the press conference of Fed Chairman Powell.

On the whole, however, it appears that the President has backed down on the statement less than of late, and the Fed was more hawkish at the end of the day, longer than expected when it woke up this morning, so we could see a continuation of the recent trend (rising yields). and the US dollar, falling stocks and risky assets) as traders digest the meeting until the end of the week.

Matt Weller, CFA, CMT, FOREX.com » Official site

forex.com stock exchange FOMC

Disclaimer: The information and opinions contained in this report are for general information only and do not constitute an offer or solicitation to buy or sell any currency contracts or CFDs. Although the information contained herein has been obtained from sources believed to be reliable, the author does not warrant its accuracy or completeness and shall not be liable for any direct, indirect or consequential damages that may result from anyone relying on such information.

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