FOMC Meeting September 2022

Updated September 22, 2022

The message is clear: the Fed has clearly indicated its desire to forge ahead with rate hikes to fight inflation while also sacrificing growth to get there. Although the Fed didn’t go with a mega-hike of 1%, it still raised rates to their highest since 2008 with another 75bp rate move for the third time in a row.

There were several moving parts to this hugely anticipated meeting including the size of the rate hike, the dot plots and economic projections, and the language used in the statement and by Chair Powell. The persistent aggressive tone by officials in recent communication was backed up by the changes in the dot plot.

For this year, the median policymaker sees 125bp by year end with two FOMC meetings remaining. Officials then see the Fed funds rate peaking between 4.4% and 4.9% in 2023 at a median rate of 4.6%, substantially higher than seen in June, before rate cuts in 2024 with the median dot dropping to 3.9%.

This cycle of historic rate hikes will come at a cost with GDP slowing and unemployment rising to 4.4% by next year. An increase of that size is often associated with recessions. Indeed, Powell conceded that may be the outcome, especially if the Fed has to keep tightening aggressively. “Don’t fight the Fed” is the phrase du jour, and with no pivot in sight, does that mean something has to break before inflation breaks?

FOMC Meeting Preview

The world’s most powerful central bank is set to raise interest rates for the fourth time this year to rein in surging inflation.  Markets are pricing in another 75-basis point move by the FOMC, which will make it three big hikes in a row. The end rate for Fed funds is a key focus as it has moved notably higher in recent weeks owing to hotter-than-expected August inflation and persistent hawkish rhetoric by officials. The extension of the “dot plots” through 2025 will also offer a lot of insight into how policymaker’s view the unfolding economic cycle.

Fed members are squarely focused on inflation at present and the latest figures strengthened the case for another jumbo-sized rate hike. The data also highlighted the persistent and sticky nature of price pressures, driven by shelter inflation which has a lagging effect and continues to rise.

Are we into shock-and-awe territory for the FOMC and a mega-hike of 100 basis points? A “hike of the century” as one investment bank called it, would unnerve Wall Street, and imply policymakers in are in panic mode. It would also raise the likelihood that the Fed will overtighten policy and increase the chances of a hard landing.

The statement language will be guided by the latest Summary of Economic Projections, which were last released in June. Meaningful changes in expectations are expected with the forecast for the Fed funds rate shown in the dot plot expected to be more hawkish. The previous projections saw rates at 3.4% at the end of this year, followed by 3.8% by the end of 2023. Markets currently see rates peaking at 4.5% in March and to be cut to 4% by December next year. It seems a “hawkish hike” of 75 basis points is the minimum the market needs to keep the dollar near its highs of the year.

Written by Jamie Dutta, Market Analyst for Vantage

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