- At its latest meeting, the Federal Reserve continued its rate hiking while pointedly dropping forward guidance as to future rate adjustments.
- The Federal Reserve unanimously raised monetary policy rate by 75 on Wednesday, taking the fed funds rate to 2.25% - 2.50%, the FOMC’s longer-run estimate.
- Fed reiterated that its focus for monetary adjustments remains singularly on returning inflation to its 2% objective.
By Olumide Owolabi
At its latest meeting, the Federal Reserve continued its rate hiking while pointedly dropping forward guidance as to future rate adjustments.
The Federal Reserve unanimously raised monetary policy rate by 75 on Wednesday, taking the Fed funds rate to 2.25% -- 2.50%, the FOMC's longer-run estimate. A decision which had been largely expected and we believe was priced in by the market.
Regarding the Fed's statement: There were minimal changes when compared to June. A sentence on COVID-related lockdowns in China was removed, and there were no dissents this time around. In describing the current economic situation, the statement acknowledged softness in production and consumer spending but liked the labor market, given that job gains remained elevated with a low unemployment rate. Most importantly, the Fed reiterated that its focus for monetary adjustments remains singularly on returning inflation to its 2% objective.
Regarding Chair Powell's press conference: What started out with a hawkish tone quickly degenerated into a discussion of the Fed's growth outlook and recession in light of what Powell acknowledged as some recent slowing. However, he was adamant that the U.S. is not in a recession, highlighting labor market strength. He maintained that a soft landing remains the goal, but quickly hedged by saying that "the path is uncertain and has become narrower." The Fed's message that it is looking for "compelling evidence" of inflation moving down before stopping rate increases was overshadowed by these economic observations.
In our view, the key takeaway was the lack of a clear-cut forward guidance for upcoming meetings. Other than a sentence (kept from the June statement) anticipating "that ongoing increases in the target range will be appropriate," the pace and magnitude of future monetary rate adjustments were ambiguous. In his press conference, Powell attempted to offer some guidance by saying that "a large increase could be appropriate at our next meeting," but this was qualified by the committee's willingness to switch to a data-dependent approach going forward.
Overall, the markets interpreted the Fed's action as dovish, and thus that it is past "peak hawkishness," suggesting that interest rates could find support in the near term. However, we anticipate continued elevated asset-price volatility, as market action should be data-dependent going forward.
Our outlook for policy remains unchanged: We expect the Fed funds rate to continue to rise and ultimately hit a terminal rate of between 3.25% and 3.75% by the first quarter of next year at the latest, but with a tail risk of 4.25% - 4.50% conditioned on a persistently elevated inflation outlook.
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Fed Drops Forward Guidance, Adopts Nimble Approach