The Tightening Continues
As expected, the Federal Reserve Raised rates by 0.75% this week to a target range of 3% - 3.25%, ratcheting interest rates higher in an attempt to curb inflation. In response the markets sold off, dropping 4.6% for the week. The worry is that higher interest rates will lead to a recession, or perhaps more precisely, a deeper recession, rather than a mild one. There were no big surprises, except perhaps the tone in Chairman Powell’s statement, where he committed to maintain restrictive policy and reiterated that the process may be painful.
Despite the widely expected 0.75% increase, it was perhaps the Fed’s outlook, where the Fed raised future interest rate guidance, that caused the markets to react negatively. The projection for the Fed Funds rate for this year was raised from 3.4% to 4.4% and the projection for 2023 was raised from 3.8% to 4.6%. This means that interest rates will stay higher for longer than the market expected, which put downward pressure on stocks, bonds, commodities, and real estate.
The Fed’s inflation forecast shows a 2022 inflation rate of 5.4%, as measured by PCE, the Fed’s preferred inflation measure. They expect PCE inflation to fall to 2.8% in 2023 and 2.3% in 2024. Of course, the Federal Reserve has been very wrong on inflation so far, so we will have to see the data. A clear drop in inflation would be welcome news that could spark a stock market rally.