Research Reports

As expected, the Federal Reserve raised short-term rates by one quarter of a percentage point (25 basis points) earlier today, the first rate hike since the end of 2018. Even more important, the Fed signaled a new level of hawkishness in terms of future rate hikes as well as Quantitative Tightening.

The "dot plot," which show the pace of rate hikes anticipated by policymakers, suggests the median Fed official thinks short-term rates will go up 1.75 percentage points this year, which would be consistent with one 25 bp rate hikes at each and every meeting for the remainder of the year. This would also be consistent with the new language in the Fed's statement that it anticipates rate hikes will be "ongoing." Notably, this would also mean the Fed is prepared to keep raising rates through the mid-term election season, without pausing.

In addition, the median "dot" suggests another 75 - 100 bp in rate hikes in 2023, which would take short-term rates to a peak of about 2.75%. That, in turn, is slightly above the median estimate for the average short-term rate over the long run. In other words, the Fed now thinks it'll overshoot on rates, although not by much.

But the Fed didn't only change policy on rate hikes, it also shifted earlier the timing on Quantitative Tightening by saying it "expects to begin reducing [its balance sheet] at a coming meeting." It looks like the Fed will start QT in May unless the economy runs into some unexpected headwinds. Notably, Powell said at the press conference that QT will be faster than it was back in 2018-2019. The fastest pace in that cycle was $50 billion per month. Look for a pace of around $75 – 100 billion per month in this cycle.