FOMC Meeting: Fight against inflation and financial markets isn’t over

The Federal Reserve knows that their mission to tame inflation isn’t complete, and odds are rising that the central bank raises the target range for the fed funds rate more than either we or financial market anticipate. There has been some good news on the inflation front, but the Fed can’t dampen the inflation attributed to supply-side shocks because the target fed funds rate is a blunt instrument that impacts only the demand side of the economy.

What you will learn:

• The FOMC raised the target range for the fed funds rate by 50bps to 4.25% to 4.5%, as was widely expected. This brings the cumulative rate hikes increase to 425bps, the most since 1980.
• The Fed doesn’t anticipate pivoting until 2024 – when they expect 100bps of easing – which means the fed funds rate will stay above the neutral rate of 2.5% in 2023. There were hawkish upward revisions to their forecast for inflation next year, while they concurrently reduced their GDP growth forecast and nudged up the unemployment rate average for the final three months of 2023.
• There were not many changes to the post-meeting statement, and there were no major surprises during the press conference. The key element is that the forward guidance did not change. The Fed stressed the need to attain a stance that is “sufficiently restrictive” but also factor in “cumulative rate hikes.”