- The FOMC increased rates by 75 basis points for a third straight meeting
- Economic projections were updated to show weaker growth, higher inflation, and higher benchmark rates ahead
The FOMC lifted the federal funds target range by 75 basis points for a third straight meeting, to 3.00-3.25 percent. While the post-meeting statement was virtually identical to that put out in July, the committee’s economic projections were updated to show weaker growth, higher inflation, and higher benchmark rates than had been anticipated three months ago.
Specifically, the median FOMC member now expects that annual real GDP growth will remain south of 2.0 percent through 2025, the unemployment rate will climb to average 4.4 percent at the tail end of each of the next two years, and core PCE inflation will remain above the 2.0 percent goal until at least 2026. Against that backdrop, policymakers expect to lift the funds target by another 125 basis points this year and by 25 basis points in 2023.
As always, these forecasts should be taken with a grain of salt. Just nine months ago, the FOMC expected to lift its benchmark target to 0.75-1.00 percent this year and to continue a slow move up to 2.00-2.25 percent by the end of 2024. Downside inflation surprises could temper the Fed’s rate path going forward just as stronger than expected price pressures have steepened it this year.
That said, even the Fed’s own outlook suggests that the tightening cycle is nearing its conclusion. And while Chair Powell said yesterday that rates are now at the low end of restrictive territory, it is important to underscore that the spread between the 10-year yield and fed funds is still in positive territory and that financial conditions in aggregate are not yet recessionary. There remains some scope for a soft landing, even if it is diminishing with each outsized rate hike.