As expected, the Federal Reserve has bolstered its key rate by 75 basis points, bringing it to 3.00%-3.25% on Wednesday, its highest point since 2008, as the central bank struggles to tame inflation. That makes it the third straight rate increase of that magnitude.
Its job is not yet done. The Federal Open Market Committee "anticipates that ongoing increases in the target range will be appropriate." It will also continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as previously described in its plan to shrink its balance sheet.
By raising the cost of borrowing, the central bank intends to reduce supply to bring it more in balance with demand. When supply and demand are more aligned, then price increases should recede.
"The economy will begin to slow much more significantly now that the funds rate is above 3%," said SA contributor Victor Dergunov. "Also, we don’t know how much of an effect the latest rate increase will have on inflation." For stock prices, he sees more volatility and downside in the coming months.
Soon after the rate hike, the stock markets turned to red, with the Nasdaq slipping 0.9%, the S&P 500 off 0.7%, and the Dow dipping 0.7%. The 10-year Treasury yield initially spiked to 3.613%, compared with 3.568% before the rate hike, then slipped to 3.575% at 2:17 PM ET.
"The Fed now sees rates going to nearly 4.5% by year-end compared to a median projection of 3.4% in June and just 1.9% back in March," said Bankrate Chief Financial Analyst Greg McBride. "With two meetings remaining in 2022, that indicates at least one more 0.75% hike is in the offing."
He added: "How high interest rates eventually go and how long they will have to stay there are almost entirely dependent on the path of inflation in the months ahead." Also see: Fed's dot plot signals policy rate topping 4% in 2022, peaking in 2023
Another SA contributor, Lawrence Fuller, notes that the FOMC projections indicate a rough landing ahead. "It increased its forecast for the Fed funds rate to 4.4% by the end of this year and 4.6% for next year, while lowering GDP growth to 1.2% and increasing the unemployment rate to 4.4% in 2023. That combination will not produce a soft landing, so risk asset will be under pressure in the near term," he said.
Dan Varroney, CEO of Potomac Core Consulting, also sees the risk of a recession increasing. "Early on the Fed hoped to thread the needle and navigate the economy to lower inflation without a recession. Odds are highly unlikely as inflation remains persistent in food, housing, and electricity costs and not likely to ease anytime soon," he said. (Added at 3:18 PM ET).
The committee repeated its commitment to return inflation to its 2% goal. "Recent indicators point to modest growth in spending and production," the FOMC's statement said. "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."
As has been the case since late February, the war in Ukraine is creating additional upward pressure on inflation and weighing on global economic activity, it added.
Chair Jerome Powell will provide more explanation at the 2:30 PM ET press conference.
As usual, the Fed policymakers said they'll adjust monetary policy "if risk emerge that could impede the attainment of the committee's goals."
Last week, the Consumer Price Index in August rose 8.3% from a year ago, higher than the 8.1% increase expected, and down slightly from the 8.5% Y/Y jump in July.