Today, you receive a full recap of what happened at Wednesday’s Fed meeting. Here ’s is part of the Fed’s press release issued at 2:00 pm ET Wednesday:
“The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 4-1/4 to 4-1/2 percent. The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities.”
Fed raised interest rates by 0.50% as we predicted. But this was a no-brainer because that’s exactly what Jay Powell signalled. But the important part of is not what has been done but the next step. So, what will happen next?
Fed officials expect the Fed funds rate to peak between 5.0%-5.5% in 2023. The rate today is 4.5%. Using 5.25% as the median of the Fed’s projections, this implies interest rates will rise another 0.75% from current levels. Fed Chairman Jay Powell believes that 0.25% is probably the right size of the increase at the February 1, 2023 FOMC meeting. So, when we do our maths and it turns out that 0.25% is the next step and further assuming that rate hikes at subsequent meetings are capped at 0.25% each, this suggests 3 more rate hikes of 0.25% each at the next meetings to reach a fed fund rate of 5.25%:
Implied FOMC Rate Hikes
Meeting Date Rate Hike Fed Funds Target
February 1, 2023 0.25% 4.75%
March 22, 2023 0.25% 5.00%
May 3, 2023 0.25% 5.25%
According to this estimation, the Fed will reach the terminal rate on May 3, 2023 at a level of 5.25%.
Of course, we as well as the Fed really have no idea at this stage what the terminal rate will be and when iot will be reached. The Fed also has no idea what inflation, economic growth or unemployment will be. But we are sure that the Fed will stick to the path described above. Powell does not want to repeat the Volcker mistake of 1980 when Paul Volcker stopped the rate increases too soon and inflation took off. Volcker had to raise rates to 20% to undo the damage of his policy blunder.
Sven Franssen