From the Desk of Our CIO…

Yesterday’s Fed Rate Hike

Yesterday, the Fed Funds interest rate was raised 0.75%, as expected, and is now at an upper bound range of 3.25%. Inflation remains challenging. The median expectation for the effective Fed Funds rate for the remainder of 2022 is up from 3.4% to 4.4%. In 2023, the median rate is forecast to be 4.6%. In 2025, the median rate is expected to decline to 3.9%, which implies that the Fed will start to ease again in 2024. The Federal Open Market Committee (FOMC) now expects inflation near the 2% target around 2024 - 2025. Robust job gains remain. The Fed’s balance sheet reduction plan remains intact. 

Highlights from Fed Chair Powell's comments yesterday:

• The Fed is strongly committed to bringing inflation down to its 2% target.

• Ongoing Fed Funds rate increases appear to be appropriate.

• The U.S. economy has slowed from its peak rebound in 2021.

• Growth in consumer spending has slowed.

• The slowing housing sector is reflective of higher mortgage rates.

• We expect weaker economic growth abroad.

• The real GDP growth forecast is 0.2% in 2022 and 1.2% in 2023. 

• Unemployment is at a 50-year low.

• A robust labor market remains: the demand for workers is higher than available.

• The Fed expects the median unemployment rate to be 4.4% by the end of 2023.

• The Fed sees inflation expectations of 5.4% in 2022, 3.4% in 2023 and 2.3% in 2024.

• The Fed’s main message remains "unchanged" since the Jackson Hole symposium last month.

Prior to yesterday’s Fed announcement, bond yields were generally higher and stock futures were off.  Market participants are struggling to balance the realities of a very strong labor market and the wealth effect vs. lingering high inflation (despite falling commodity prices), a rising dollar and an aggressive Fed. The perennial fear of the Fed lagging too much for too long - whether raising or lowering - is again in play.  After yesterday announcement, equity markets closed at session lows.