As markets expected, the Federal Reserve raised interest rates the most aggressively in nearly three decades to curb high inflation.
On Wednesday June 15th the Federal Reserve announced that it had raised the target range for the federal funds rate, its policy rate, to 1.50% to 1.75% from 0.75% to 1.00%.It was the fed’s biggest single increase since November 1994, when Volcker was in charge, and the first 75 basis point increase in more than 27 years.
A rate increase of this magnitude has been strongly anticipated recently.The Fed funds futures market on Tuesday priced in an 89 per cent chance of a 75 basis point rise in June, up from 3.9 per cent a week ago, according to the CME’s Fed-Watch Tool.
The only surprise for the hawks
The Fed has now raised rates three times in a row, by 25 basis points in March and 50 basis points in May.At this week’s meeting, one voting member of the Fed’s monetary policy committee, the FOMC, opposed raising rates by 75 basis points, unlike the unanimous vote at the previous meeting in May. Esther George, president of the Kansas City Fed, opposed raising rates by 50 basis points.
The media said George’s opposition was a surprise, as her views on inflation had long been seen as hawkish and earlier this year as well.In recent speeches and interviews, George has urged the Fed to act “very thoughtfully and consciously” and to consider the impact of shrinking the balance sheet on the tightening cycle.Media reports suggest that George is likely to feel that the 75 basis point rise was not deliberate and intentional.
Remove the statement that inflation is expected to return to target and add a strong commitment to get inflation back to target
Resolution, according to a statement released after the meeting on Wednesday in the interest rate decisions, the federal reserve to reiterate the FOMC seeks to achieve full employment and long-term dual target inflation of 2%, but removed in March and may statement said “with properly determined to tighten monetary policy stance, (FOMC) committee, expects inflation is expected to return to the 2% inflation target for a long time,And the Labour market will remain strong.”
The commentary said the removal of the FOMC statement that it expects inflation to return to 2 per cent suggests the Fed sees persistent price pressures and has become more alert to the risk that inflation expectations could get out of control.
After saying it was supporting these twin goals by raising rates by 75 basis points, the Fed repeated what it said in March:
“The [FOMC] committee expects that it would be appropriate to allow increases in the target rate range to continue.”
Different from previous statements, this one added a sentence:
“The [FOMC] committee is strongly committed to bringing inflation back to its 2 per cent objective.”
The dot plot shows that all officials expect rates to rise above 3% by the end of this year and one expects a rate cut next year
A dot plot of fed officials’ expectations of future interest rates released after the meeting showed a significantly more aggressive outlook for rate increases in the next two years than the last one released in March.
All fed officials this time expect the federal funds rate, the policy rate, to rise above 3.0 percent by the end of the year, up from just one in May.This time, eight officials, or 44 percent of the total, predicted the final rise to 3.25-3.50 percent, five officials, or nearly 28 percent, predicted the rise to more than 3.5 percent, and five officials, 3.0-3.25 percent.
A total of 16 expect rates to be above 3.50% next year, including five who expect rates to be above 4.0% and one who expects rates to fall below 3.0%, meaning they expect a cut next year.In March, only five people expected interest rates to exceed 3 percent next year.
By 2024, 14 expect the policy rate to remain above 3.0 per cent, with 12 expecting more than 3.25 per cent, eight between 3.25 and 3.5 per cent and only four below 3.0 per cent.In March, only five people predicted an interest rate above 3.0 percent.
We significantly raised our policy interest rate forecast for this year, significantly lowered our economic growth forecast for this year, and raised our three-year unemployment rate forecast
Consistent with the projections shown in the dot plot, the updated economic outlook data released after the meeting shows that the Federal Reserve has raised the expected level of the policy interest rate across the board, with the biggest increase in this year’s above 3% :
The fed funds rate is expected to rise to 3.4% by the end of 2022, up 1.5 percentage points from the 1.9% forecast in March.
The fed funds rate is projected at 3.8% by the end of 2023, up from 2.8% in March.
The fed funds rate is projected at 3.4% at the end of 2024, compared with 2.8% in March.
Based on those projections, the Fed expects rates to peak next year and fall back the year after, but remain above 3.0%.
At the same time, the Federal Reserve has lowered its economic growth forecast for this year and next, with the biggest decline in this year. It has also raised its personal consumption expenditure price index (PCE) and core PCE inflation forecast for this year, as well as the unemployment rate forecast for the whole three years:
GDP growth is expected to be 1.7% in 2022, down 1.1 percentage points from the 2.8% growth forecast in March.GDP growth forecasts for 2023 and 2024 were lowered to 1.7% and 1.9% from 2.2% and 2.0% respectively.
The projected unemployment rate rose from 3.5 percent to 3.7 percent in 2022 and 3.9 percent in 2023, and from 3.6 percent to 4.1 percent in 2024.
PCE inflation expectations rose from 4.3% to 5.2% in 2022, fell from 2.7% to 2.6% in 2023, and fell from 2.3% to 2.2% in 2024.
Core PCE inflation is expected to rise from 4.1% to 4.3% in 2022, from 2.6% to 2.7% in 2023 and remain flat at 2.3% in 2024.
Continue to reiterate that high inflation reflects higher energy prices and strong employment growth instead of overall economic activity picking up
In its assessment of the economy, the statement did not repeat the May statement that “household spending and business fixed investment remained strong despite the overall slowdown in economic activity in the first quarter.” Instead, it said:
“Overall economic activity appears to have picked up after a slight decline in the first quarter.”
The statement continued to reiterate that “job growth has been strong in recent months” and stopped short of reiterating that “the unemployment rate has declined significantly”, saying instead that “the unemployment rate has remained low”.On inflation, the statement repeated what it said in March:
Inflation remains high, reflecting supply and demand imbalances related to the pandemic, higher energy prices and broader price pressures.
Further highlighting economic Implications of the Russia-Ukraine conflict Reiterates that the Fed is highly concerned about inflation risks and the possible impact of the outbreak in China
The statement continued to reiterate the statement that Russia’s actions in Ukraine are “causing significant” economic hardship, as first mentioned in the March statement, but deleted the phrase “there is a high degree of uncertainty about the impact on the U.S. economy.”
The may statement for the first time mentioned that “the invasion and related events are creating new upward pressure on inflation and may also put pressure on economic activity.”
“The invasion and related events are creating new upward pressure on inflation and are weighing on economic activity.”
The FOMC reiterated its may statement that the outbreak in China “may intensify supply chain disruptions” and its may statement that the FOMC is “highly concerned about inflation risks”.
Shrink the balance sheet according to the plan of May
In May, the Fed laid out a path to shrink its balance sheet, reducing its bond holdings starting June 1 by as much as $30 billion a month in Treasurys and $17.5 billion in agency mortgage-backed securities, and doubling the maximum monthly reductions three months later.
The statement didn’t reiterate that line. Instead, it said it would continue to reduce its holdings of Government bonds, agency bonds and agency MBS along the balance-sheet reduction path announced in May.