Fed Hikes 75bps, Data-Dependent Going Forward
3.5% Fed Funds Target by December 2022
As always, the Fed meeting provided something for everyone! The market expected and accepted the 75bps increase and is encouraged by the Powell-led Fed’s ability to pivot to a data-dependent stance going forward. Powell also reconfirmed 3.5% as the target Fed Funds level for the end of 2022 and acknowledged the pace of increases will slow at some point in the future. Powell does not believe we are currently in a recession and still has confidence that a recession may be avoided.
Details from Today’s Fed Meeting and Press Conference:
- The Federal Reserve raised rates 75bps to 2.5% in a unanimous decision.
- Powell declared the Fed Funds level is currently at neutral, but they will need to take the level to moderately restrictive.
- Powell reconfirmed the Summary of Economic Projections forecast at 3.5% on the Fed Funds Rate by YE 2022.
- The Fed remains focused on inflation risks, and recognizes demand is indeed slowing, but is encouraged by the labor market strength.
- Fed to be data-dependent going forward and stated it is likely appropriate to slow rate increases at some point.
- Powell does not believe we are currently in a recession.
June 2022 Summary of Economic Projections
Source: Federal Reserve, 6/15/2022
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- Jackson Hole will be held August 25-27 and is a great platform for the Fed Chair to communicate with markets.
- We have two rounds of employment and inflation reports ahead of the September FOMC meeting.
- The Fed believes Monetary Policy is working to slow demand but acknowledges that it works with a lag. The next two months will give them further evidence as to how the mechanism is filtering into the economy.
- We are watching interest rate probabilities and the 2-yr Treasury for signals that the Fed is nearing the end of the hiking cycle.
U.S. Interest Rate Probability
Source: World Interest Rate Probability, Bloomberg, 7/27/2022
2-yr U.S. Treasury vs. Fed Funds Rate
Source: Bloomberg, 7/27/2022
We are encouraged by the Fed’s willingness to shift to a data-dependent stance going forward and will utilize Powell’s playbook from the previous cycle as our guidepost.
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