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The Federal Open Market Committee (FOMC) concluded its Sept 20-21 meeting by raising the federal funds target rate by 75 basis points (bps) to a range of 3% to 3.25%.
This was the third consecutive 75 bps rate hike, and the fifth rate increase this year alone.
The Fed has embraced tough monetary policy in the face of persistently high inflation, with the latest data showing prices rising dramatically higher than last year, even as oil and gasoline prices float lower.
The Fed’s hawkish stance is still relatively new. It was only eight months ago, after all, that the nation’s central bank stopped buying bonds in an effort to lower long-term interest rates. And even when they did raise rates in March, they hiked by a mere 25 bps.
“They delayed for so long that now they’re playing catchup,” said Nick Sargen, lecturer at UVA’s Darden School of Business and chief economist at Fort Washington Investment Advisors.
The Fed’s Inflation Problem
Federal Reserve Chair Jerome Powell used his August speech at Jackson Hole to make it plain to anyone who was still confused about the Fed’s policy stance. The Fed would keep raising interest rates until inflation was under control, Powell stated bluntly.
“Without price stability, the economy does not work for anyone,” said Powell. “In particular, without price stability, we will not achieve a sustained period of strong labor market conditions that benefit all.”
The stock market finally took the hint.
After a six-week bear market rally, stocks tanked after investors finally understood that there would be no pivot to a more dovish policy. That message was only underscored by the August consumer price index (CPI) data, which showed that rising prices were becoming more embedded in the U.S. economy.
For months, government officials—especially in the Biden administration—had been blaming the terrible inflation numbers on sky-high gasoline prices. But in August, gas dropped by 12% compared to the month before while energy prices overall declined by 6%.
Those declines were undercut by soaring prices elsewhere. Food jumped by 0.8% for the month, and was more than 11% more expensive than the same time last year. Staples, such as cereal and milk, were 16% higher year over year.
Core inflation, which strips out volatile food and energy costs, has also kept rising. Core CPI inflation gained 0.5% on the month and 6.3% on the year, further underlining that high prices were occurring throughout the economy.
“Food and health care inflation are still high and continuing to rise,” said Danielle DiMartino Booth, chief executive and chief strategist of Quill Intelligence. “More problematically, price pressures in U.S. shelter, which comprises more than 40% of the CPI, should continue to intensify in the coming months due to the lagged manner housing moves through the index.”
Inflation will remain abnormally high at least through the end of next year, a frustrating outcome for those who believe that the Fed was simply too accommodative for too long because they were fighting the last war.
“They were looking at 2008 as a blueprint,” said Troy Ludtka, Senior US Economist at Natixis CIB Americas. “That one was a financial crisis, while this was an exogenous shock; the model was backwards.”
U.S. Economy in Limbo
While there’s no debate that inflation is a persistent problem, there’s less certainly around what’s going on with the broader U.S. economy.
The argument over whether or not the nation was in recession, especially after a second consecutive quarter of negative economic growth, was obscured by politics. And the debate largely misses the point: some metrics were positive, while others flashed warning signs.
One reason for optimism can be found in the labor market.
The unemployment rate is at 3.7%, roughly where it was before the pandemic, while employers added 315,000 workers in August. There are also more than 11 million jobs available, roughly four million more than in early 2020. Anyone who wants a job can find one.
Wages are rising, up by roughly 5.7% over the past year, according to the Atlanta Federal Reserve. Raises were about two percentage points lower in August 2019.
At the same time, other metrics point toward a slowing economy.
The housing market is struggling in the face of higher mortgages rates, which recently jumped above 6% for the first time since 2008. Home sales fell to their lowest level since 2008, and prices started to decline, as buyers have struggled to afford homes amid higher borrowing costs and low supplies.
Meanwhile, consumers continue to feel the blues. The Ipsos-Forbes Advisor Consumer Confidence Poll recently fell by 2.2 points to 49.9, roughly 10 points below where it was in early March 2020.
The economy is only expected to grow at a seasonally adjusted annual rate of 0.3% in the third quarter, per the Atlanta Fed. While that’s not an outright decline, it doesn’t inspire much confidence after the poor start to the year.
The Fed is hoping that it’s able to raise interest rates high enough to moderate inflation over the long term without causing too much job loss. Whether or not they can succeed, is still very much an open question.
SEP Economic Projections
The September FOMC meeting was accompanied by the latest Summary of Economic Projections, which gives market observers a sense of where Fed officials believe several important economic indicators are heading over the short and medium term.
The latest SEP estimates that:
- GDP should grow by 0.2% in 2022, a marked decrease from the June projection of 1.7%.
- Unemployment rate may hit 3.8% in 2022, which is only 0.1 percentage point higher than the June projection.
- PCE inflation to grow by 5.4% in 2022, up from the June projection of 5.2%.
- Core PCE inflation to grow by 4.5% in 2022, higher than the June projection of 4.3%.
- The federal funds target rate will rise to 4.4% in 2022, which is a full percentage point higher than the June projection.
Upon release of the Fed’s decision and the SEP, the stock market immediately declined as investors were once again reminded that the Fed anticipates raising interest rates throughout the year, even if it results in less economic growth.
The Fed isn’t messing around.
Federal Open Market Committee (FOMC) FAQs
What is the Federal Reserve?
The Federal Reserve is the central bank of the United States, and is generally considered to be the most powerful central bank in the world. Often referred to as the Fed, it was founded to direct monetary policy and manage the financial system. A seven-member board governs the Fed, and there are 12 Federal Reserve Banks in regions throughout the U.S.
What is the FOMC?
The Federal Open Market Committee (FOMC) is main policy making body of the Fed. The FOMC sets the federal funds target rate and makes other monetary policy decisions for the Fed. The FOMC meets eight times a year to vote on interest rates and policy priorities.
Who is on the FOMC?
There are 12 members of the FOMC:
- The seven members of the Fed Board of Governors, led by Fed Chair Jerome Powell.
- Five of the 12 Federal Reserve Bank presidents, although the head of the Federal Reserve Bank of New York is a permanent member of the FOMC. The other four voting positions are filled on a rotating basis by the presidents of the other Federal Reserve Banks across the country. Even though most presidents don’t vote, they can all attend the meetings and debate policy.
When is the next FOMC meeting?
The next FOMC meeting is scheduled for September 20-21. The FOMC hold eight scheduled meetings a year, one every every six weeks or so. The committee can meet whenever it feels necessary and believes that it needs to act, such as during a financial crisis.
When are the FOMC minutes released?
The FOMC releases minutes of its meetings three weeks after the most recent meeting. A full transcript isn’t available for a full five years after a meeting.
How many times will the FOMC raise rates in 2022?
The FOMC has raised interest rates four times in 2022 so far, putting the federal funds target rate at 2.25% to 2.50%. According to the CME FedWatch Tool, market professionals are betting that the FOMC will most likely raise the fed funds rate to 3.25% to 3.50% by the end of the year. This suggests that the FOMC could raise rates at least two more times this year, for a total of six rate hikes in 2022.