Fed Emphasises The Need To Stay On Top Of Inflation

 

 

- FOMC lifts rates by 75bps to 3-3.25% as expected

- A further three-quarter point hike expected in November

- Fed staff downgrade growth, upgrade inflation estimates

- Powell puts price stability front and centre of policy

 

By Harry Daniels 

LiveSquawk News 

@HarryDaniels71 

 

 

22 September 2022 | 15:45 GMT

 

On Wednesday the Federal Reserve left investors in no doubt of its intention to persevere with its interest rate hike cycle until it effectively cools inflation and or the economy.

 

In line with the majority of analysts, the Fed lifted interest rates by 75 basis points to a range of 3% to 3.25%, with the accompanying statement little changed. However, updated staff forecasts in the form of the dot plot indicated that the central bank was a long way from it goal.  

 

The median view of policymakers put the federal funds rate at 4.4% by the end of 2022, a whole percentage point higher than the previous outlook. Beyond year-end, the rate is estimated to peak at around 4.6% in 2023.

 

In the immediate aftermath, the US rate curve flattened, with the 2s10s spread through 50bp inverted, and US indices sold off. Traders observed that market volatility suggested a level of surprise at the hawkish outturn.  

 

Revisions to growth, jobs and inflation forecasts

Updated staff economic projections (SEP) reflected the Fed’s near-term concerns for the economy. The bank revised GDP growth lower in 2022 and 2023 to 0.2% and 1.2% respectively, from 1.7 for each in the June projections, a significant downgrade.

 

The median forecast now has the unemployment rate rising to 4.4% by Q4 2023, 70bps higher than the current level and 50bps above the prior peak in June.

 

On inflation, participants now predict price pressures will endure for longer. Core PCE inflation was revised up 20bp for 2022, to 4.5%, with 2023 upwardly revised 40bp, to 3.1%. Morgan Stanley analysts noted core inflation remains above target in 2023 even as the dot plot is showing cuts. “While the median SEP projections appear to lock in a 75bp rate increase for November, only one dot separates the median from a lower end-2022 rate, which suggests that the debate in the Committee about November (and certainly about December) will remain lively.”

 

Reviewing the rate path

Putting price stability at the heart of the current tightening narrative, Fed Chair Jerome Powell reiterated the central bank's inflation fighting credentials at his press conference. He stated that the Fed remained “strongly committed to bringing inflation back down to its 2% goal”, and warned that “without price stability, the economy doesn’t work for anyone.”

 

Analysts at BofA Global Research said, “The main messages from the press conference were in line with our expectations. Namely, that the overarching goal of price stability will require a period of restrictive monetary policy".

 

Banks have been swift to readjust estimates for the end of the latest Fed tightening cycle. Pinpointing the pivot will depend on a number of factors according to Morgan Stanley’s chief economist, Ellen Zentner: “The translation for markets can be that the terminal rate will keep going higher until the Fed "discovers" one of two outcomes: (1) labour market cools […] or (2) or growth data stays muted – which the Fed laid down as preconditions to cooling inflation.”

 

BofA’s Michael Galpen now expects the Fed to raise its policy rate by 75bp in November and 50bp in December, followed by two 25bp rate hikes in February and March of next year. The median forecast does not deliver much in the way of disinflationary pressure, with the unemployment rate rising by only 70bps and growth remaining positive, but below trend. Hence, it would be reasonable to expect policy to remain tighter for longer in order to bring inflation down.”

 

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