September 21, 2022 | 15:07
FOMC Policy Announcement and SEP — Higher Rates for Longer
The FOMC raised the target range for the federal funds rate by 75 bps for the third consecutive meeting, now at 3.00%-to-3.25%, as expected. This lifted the cumulative increase since March to 300 bps, which is the most ever over a seven-month interval since fed funds were first targeted in the 1980s. And the Fed’s not done. The Statement repeated the phrase in place since March, that the Committee “anticipates that ongoing increases in the target range will be appropriate”. Another rate hike on November 2nd looms.
In the Summary of Economic Projections (SEP), the median forecasts for year-end policy rates revealed a theme of 'higher for longer'. It was raised by 100 bps to 4.375% for 2022 and by 87.5 bps to 4.625% for 2023. For this year, all but one participant pencilled in a projection above 4% compared to none in June’s SEP. For next year, there was a near perfect tri-model distribution (6 @ 4.875%, 6 @ 4.625%, 6 @ 4.375%).
The median forecast for the now penultimate 2024 was raised by 50 bps to 3.875%, still showing some rate cuts but leaving policy rates even higher above the neutral range. The first pass at 2025 has policy rates back in the neutral range (2.875%) but still above the longer-run median (2.50%)
Elsewhere, among the other projections, there was a median theme of slower real GDP growth, higher unemployment rates and faster inflation. For the 2022-24 interval, GDP growth (Q4/Q4) was 0.2% (-1.5 ppts), 1.2% (-0.5 ppts) and 1.7% (-0.2 ppts), respectively. The jobless rate (Q4) was 3.8% (+0.1 ppts), 4.4% (+0.5 ppts) and 4.4% (+0.3 ppts).
On the inflation front, total PCE inflation (Q4/Q4) was 5.4% (+0.2 ppts), 2.8% (+0.2 ppts) and 2.3% (+0.1 ppts), respectively. It was 4.5% (+0.2 ppts), 3.1% (+0.4 ppts) and 2.3% (unchanged) for the core. Importantly, the inflation uplift happened despite higher policy rates, slower economic growth and more labour market slack, as participants now expect inflation to be more stubborn than before (including still 2.1% y/y by 2025 Q4).
Finally, in the presser, Chair Powell said the Fed was sticking to the powerful policy themes revealed in Jackson Hole last month. And, importantly, that the FOMC is not yet at the point where it’s “appropriate to slow the pace of increases”. Bottom line: It’s looking like a fourth consecutive 75 bp rate hike on November 2nd.