Fed Goes Bigger

The Federal Reserve raised rates by three-quarters of a percentage point (75 basis points) today, the most at any meeting since 1994 and exactly the move Chairman Jerome Powell was dismissive about in early May after the last meeting. As a result, the target for the federal funds rate is now 1.50 – 1.75%, and it's headed higher. At the post-meeting press conference, Powell made it clear that the Fed doesn't expect 75 bp rate hikes to become "common," but a rate hike in the 50 – 75 bp range should be expected at the next meeting in July.

The "dot plot" from the Fed, which is released every three months and which shows the path monetary policymakers expect the funds rate to take, shows a much steeper pace of rate hikes than the dot plot released back in March. Earlier this year, the dot plot suggested the funds rate would finish 2022 around 1.875%; now the Fed suggests it will finish around 3.375%. That's an additional 150 bps. Perhaps more important: every single Fed policymaker thinks the funds rate will finish this year above 3.00%. For 2023, the median policymaker projects the funds rate will finish at 3.625%, before gradually starting to decline in 2024 and beyond.

Notably, the Fed downgraded its real GDP growth forecast for this year to 1.7% versus a prior estimate of 2.8%. Growth in 2023-24 was revised down slightly. Meanwhile, the Fed increased its estimate for PCE inflation this year, to 5.2% from 4.3%, but slightly revised down its forecast for inflation in 2023-24. We believe the Fed's inflation forecasts for 2023 and 2024, 2.6% and 2.2%, respectively, are ridiculously low. On net, the Fed downgraded its expectations for nominal GDP growth (real GDP growth plus inflation), which is hard to square with increasing the path for short-term interest rates unless it's seen as a major admission of past policy mistakes and that the Fed knows it is well behind the inflation curve.