“We anticipate that ongoing rate increases will be appropriate the pace of those changes will continue to depend on the incoming data and the evolving outlook for the economy.” “Over coming months, we will be looking for compelling evidence that inflation is moving down, consistent with inflation returning to 2 percent,” said Powell. In his prepared statements, Powell was clear about the Fed’s commitment to slowing inflation, emphasizing the plan to expeditiously move the policy rate up to more normal levels. Households expect inflation to run at a 3.3% annual rate over the next five years, up from 2.8% one year ago. Preliminary June data from the University of Michigan consumer sentiment survey show the public expects an annual inflation rate of 5.4% over the next year, up from 4.2% one year ago. Inflation tends to be a self-fulfilling prophecy, where consumer expectations for inflation in the future result in higher inflation. In addition to CPI data, the Fed also considers forward-looking expectations for inflation. The higher rate is needed to slow the economy and bring inflation down to the longer-run goal of 2%. This is an upward revision of 1.5 percentage points from the SEP projection in March. The current median projection for year-end 2022 calls for a target rate of 3.4% (see below for the so-called dot plot). The Federal Open Market Committee (FOMC) releases a Summary of Economic Projections (SEP) four times each year, which projects a range for where the Fed funds rate should be. The dynamic shifted this week as Powell stated an increase of 75 bps was necessary in June, and that the decision will be between 50 and 75 bps in July. After the May meeting, Fed Chairman Jerome Powell was careful to indicate that increases of 50 bps were also expected at the June and July meetings. This was observed for the first increase of 25 bps and was referred to as the “Fed ratchet.” Spiking inflation over the last several months resulted in an increase of 50 bps in May. The Fed Ratchet Becomes the Fed CrowbarĮarlier this year, the Fed indicated it would implement a slow and steady increase in rates that would be communicated well in advance, allowing markets time to adjust. Here we review important context around the rate hike, including market reactions and recession indicators, and share our latest thoughts on portfolio positioning.
The decision to implement the larger rate hike was influenced by concerns over recent inflation data-consumer prices were just reported to have risen 8.6% year-over-year-and implies the Fed sees an urgent need to combat inflation aggressively. The hike marked an abrupt departure from earlier guidance provided by members of the rate-setting committee, who had been telegraphing an increase of just 50 bps. The target federal funds rate range now stands at 1.50% to 1.75%. fell into recession because of higher rates.On June 15, the Federal Reserve (Fed) raised the key short-term interest rate by 75 basis points (bps), the largest increase since 1994. Elizabeth Warren warned Powell that she would blame the Fed if the U.S. Other senior Fed officials have echoed that view, including Chairman Jerome Powell, but it is exceedingly rare for central bankers to predict a recession given the power they have over the economy and the political sensitivity of such declarations.Įarlier this week, for example, Massachusetts Sen. While a recession is ”certainly possible,” he said, ”I actually think we’ll be fine.” labor market as evidence that there is no broad economic slowdown under way. He pointed to strong consumer spending and the U.S. The combination of high inflation and rising interest rates has spawned fresh worries about the economy sinking into recession, but Bullard said such talk is premature. He warned last year that the central bank was misjudging inflation, but it is only been in the past six months that other senior Fed officials have come to the same conclusion. Higher rates raise the cost of borrowing for credit cards, mortgages, new cars and other loans to consumers and businesses.īullard has been the most outspoken Fed official in favor of higher rates. The Fed last week raised its benchmark short-term interest rate to a range between 1.5% and 1.75% and signaled that it could go to as high as 3.4% by year-end.
”If all goes well, inflation starts coming down to our target, you won’t need the policy rate to be so so high,” Bullard said.
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