The Federal Reserve raised its target fed funds rate by 0.75% on Wednesday to a new range of between 3% and 3.25%, its third 0.75% rate hike in four months. The Fed said it will continue with its previously announced plan to let Treasury securities and agency debt and agency mortgage-backed securities roll off its balance sheet on a monthly basis.
“Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures,” the Fed said in a statement.
The Fed reassured investors that job gains have been strong and the unemployment rate has declined, but noted spending and production rates have softened.
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The statement comes after the Labor Department reported the U.S. economy added 315,000 jobs in August, missing economist estimates of 318,000 jobs. The unemployment rate climbed to 3.7%, and hourly wages were up 5.2% from a year ago.
All 12 Fed members voted unanimously for the 0.75% hike.
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The Consumer Price Index (CPI) was up 8.3% in August, down from a 2022 peak of 9.1% in June. The bond market currently projects a 62.8% chance the fed funds rate will rise at least another 1.25% by the end of the year.
The SPDR S&P 500 ETF Trust SPY was lower by 0.6% on Wednesday following the announcement.
Economic Projections: The Federal Reserve also released new “dot plot” economic forecasts on Wednesday. Six of the 19 FOMC members are projecting interest rates will peak at a range of between 4.75% and 5% in 2023. Twelve of the 19 FOMC members see rates rising to a range of between 4.5% to 4.75% or higher next year.
Federal Reserve members are projecting a 2022 U.S. unemployment rate of 3.8%, up from 3.7% in June. The committee’s 2022 GDP growth projection dropped from 1.7% to 0.2%. The Fed’s 2023 GDP growth rate also dropped from 1.7% to 1.2%. The Fed is now projecting 2022 PCE inflation of 5.4%, up from previous estimates of 5.2%.
Voices From The Street:
Mark Putrino, Chief Market Technician and Lead Educator at Benzinga.com, said the higher interest rates rise, the more companies will struggle to grow profits due to higher borrowing costs.
"However, after few days Wall Street may come to think this aggressive move is a good thing. It shows the Fed is serious about fighting inflation," Putrino said.
Jan Szilagyi, co-founder and CEO of investment research firm Toggle AI, said the Fed seems to be taking a page out of the 1980's inflation playbook.
"Public and market tolerance for tighter monetary policy is far higher with the unemployment rate below 4%, a historic low," Szilagyi said.
Charlie Ripley, Senior Investment Strategist for Allianz Investment Management, said investors shouldn't expect the stock market to keep taking these aggressive rate hikes in stride.
"Chairman Powell reiterated the Fed’s hawkish stance with another aggressive rate hike and set the tone for markets to prepare for a tougher economic situation ahead as the battle against inflation endures," Ripley said.
Photo: Courtesy of International Monetary Fund on Flickr
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