The FOMC lifted the federal funds target by 75 basis points yesterday, the largest increase since 1994. The statement and Jerome Powell’s post-meeting press conference both highlighted the committee’s commitment to returning inflation to the 2.0 percent target, with the Fed chair noting the risks are for now still titled to the upside. Moreover, policymakers now expect the overnight benchmark to end the year at 3.4 percent, suggesting rate hikes of at least 50 basis points at three of the remaining four meetings.
Fed expectations, however, should be taken with a grain of salt. Just six months ago, the FOMC expected a total of 75 basis points in tightening across all of 2022 and didn’t anticipate that the funds target would reach its current level until the end of next year. At the outset of 2015, 2016, and 2019, in contrast, the committee significantly overestimated subsequent tightening (in the event in the latter case, the FOMC actually cut rates). It should be clear by now that the Fed will continue to move aggressively as long as the prevailing trends remain intact, but it should be similarly obvious that the backdrop on the supply side is prone to rapid shifts due to pandemic and war effects. There is still the potential for supply chain healing and geopolitical de-escalation to lower the inflation rate and obviate the need for the aggressive policy path that the Fed has laid out.
Absent those developments, a soft landing is likely to prove elusive. The Fed tends to overtighten during these periods due to the lags associated with both inflation and monetary policy itself, with six of the last eight tightening cycles leading directly into recessions. If this cycle is to buck the trend, it would likely owe greatly to exogenous dynamics rather than policy deftness.
Hear more about the Fed announcement to raise rates
FOMC raises rates again – Hope is not a strategy (19 min)
In the June FOMC meeting, the Fed announced an increase of interest rates by three quarters of a percent, the largest increase in nearly 30 years. Nationwide’s Chief Economist David Berson and Deputy Chief Economist Bryan Jordan provide their perspectives on the Fed’s announcement and share their outlook on future rate increases.
- How much higher could the Fed raise rates?
- How could this help to slow down inflation?
- Could a recession be on the horizon?
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