Full recap of the Fed’s rate hike and Powell’s comments on the outlook for future
Powell says Fed will ‘plan for the worst’ on shelter inflation
Fed Chair Jerome Powell said that the central bank will not count on the lagged impacts of shelter costs in inflation metrics when determining its policy moves.
“I think that shelter inflation is going to remain high for some time. We’re looking for it to come down, but it’s not exactly clear when that will happen. It may take some time. Hope for the best, plan for the worst,” Powell said.
Shelter costs, especially rent, has become a key source of inflation in recent months and oil and other commodity prices come down. Because of how the metric is calculated, rising rents show up with a lag in the official inflation data.
— Jesse Pound
’75 is the new 25,’ says Bill Zox of Brandywine Global
As the Federal Reserve vows to continue raising interest rates to tamp down on inflation, investors should brace for additional hikes of 75 basis points in the future, said Bill Zox, portfolio manager at Brandywine Global.
Projections from the central bank’s meeting indicated participants expect to increase rates by at least 1.25 percentage points in the two remaining meetings this year.
“I believe 75 is the new 25 until something breaks, and nothing has broken yet,” Zox said. “The Fed is not anywhere close to a pause or a pivot. They are laser-focused on breaking inflation. A key question is what else might they break.”
— Michelle Fox
Powell says inflation has ‘not really’ come down, despite some supply side healing
Fed Chair Jerome Powell said the inflation level hasn’t fallen as much as the central bank had expected it would by this point, in the press conference Wednesday following the two-day policy meeting.
“Our expectation has been we would begin to see inflation come down, largely because of supply side healing,” he said. “We haven’t. We have seen some supply side healing but inflation has not really come down.”
He said that core PCE inflation, “on a 3- 6- and 12-month trailing annualized basis,” is now at 4.8%, 4.5%, and 4.8%, respectively.
“That’s a pretty good summary of where we are with inflation and that’s not where we wanted to be,” Powell said. “We need to continue, and we did today do another large increase as we approach the level we think we need to get to. We’re still discovering what that level is.”
— Tanaya Macheel
Stocks recover as Fed tees up more rate hikes to tame inflation
Stocks rose as Federal Reserve Chair Jerome Powell pledged to boost rates to slow down inflation.
The central bank hiked interest rates by 75 basis points for a third consecutive time. The major averages initially slipped, but they recovered during Powell’s question-and-answer session as he reiterated his tough stance on fighting inflation.
The Dow Jones Industrial Average leapt more than 100 points. The Nasdaq gained 0.9%, and the S&P 500 added 0.6% around 3:04 p.m. ET.
No one knows if Fed hikes will mean recession, Powell says
The Federal Reserve has always understood that it may be difficult to manage a soft landing while raising interest rates enough to tame high inflation.
“No one knows whether this process will lead to a recession or if so how significant that recession would be,” Chair Jerome Powell said Wednesday. “That’s going to depend on how quickly wage and price inflation pressures come down, whether expectations remain anchored and also if we get more labor supply.”
He added that the chances of a soft landing will diminish if policy needs to get more restrictive for the Fed to reach its goal of 2% inflation. However, high inflation would inflict greater pain long term, he said.
Speed of rate hikes adds risks, CFRA’s Stovall says
With the Federal Reserve signaling that it will push its benchmark well above 4%, including potentially another large rate hike this year, the central bank is increasing risks for investors and the economy, according to CFRA chief investment strategist Sam Stovall.
“With the FOMC now setting a ‘higher for longer’ interest rate policy, the pace of the dance has picked up, increasing the risk that both spin out of control. The Fed increased its year-end rate to 4.4% from the 3.4% expected after the June meeting,” Stovall said.
— Jesse Pound
Powell reiterates his stance from Jackson Hole, says Fed is committed to 2% inflation
Federal Reserve Chair Jerome Powell said Wednesday his views haven’t wavered since his market-jolting speech from Jackson Hole a month ago.
“My main message has not changed since Jackson Hole,” Powell said. “The FOMC is strongly resolved to bring inflation down to 2%, and we will keep at it until the job is done.”
He added that so far there’s only modest evidence that the labor market is cooling off, citing a slight decline in job openings, that quits are off their all-time highs and that payroll gains have moderated but only by a little bit.
The central bank will need to bring the funds rate to a “restrictive level” and keep it there “for some time.” To do that, it’ll be looking for three things: a continuation of growth running below trend, movements in labor market showing a return to better balance between supply and demand, and “clear evidence” that inflation is moving back down to 2%.
— Tanaya Macheel
Reducing inflation may require sustained period of below trend growth, Powell says
The Federal Reserve is still committed to using its tools to bring high inflation back inline with its target of 2% and keep long-term expectations steady, but that may take longer than expected and hurt the labor market.
“Reducing inflation is likely to require a sustained period of below trend growth,” Federal Reserve Chair Jerome Powell said in Wednesday’s press conference. “And, it will very likely [mean] some softening of labor market conditions.”
He also hinted that a hit on the labor market may be worth it over the long term, and that the central bank will stay the course to get to its goal.
“Restoring price stability is essential to set the stage for achieving maximum employment and stable prices over the long run,” Powell said. “We will keep at it until we’re confident the job is done.”
Sharper hikes could be ahead in 2022, BofA’s Cabana
Harsher interest rate increases are likely in store for the remainder of the year, as the Federal Reserve has set its sights on a target fed funds rate of 4.4% by the end of 2022, according to Bank of America’s Mark Cabana.
He noted that this target rate suggests another 75 basis point increase is possible in November and a 50 basis point hike could be in store for December.
Cabana noted the market’s expectations for inflation are dropping and the fed funds have no longer priced in a rate cut for next year.
He added that the 30-year bond yield was dropping, while the short end like the 2-year was rising rapidly. “That just suggests the Fed will be credible in their fight against inflation,” he said. The 10-year yield hit a high of 3.64% but fell back sharply to 3.54%. The longer duration yields reflect concerns about the economy.
–Patti Domm, Darla Mercado
Dot plot shows aggressive rate hike path for rest of 2022
The Fed’s dot plot shows that the central bankers are considering raising the Fed funds rate to as high as 4.4% by the end of this year. That may be a more aggressive pace than investors expected.
Because there are only two meetings left in 2022, that would imply one of those events would deliver another 0.75 percentage point hike. Many had expected the Fed to reduce the size of its hikes going forward.
— Jesse Pound
Yield on the 2-year Treasury note tops 4.1% following Fed hike
The yield on the 2-year Treasury – the instrument most sensitive to the Federal Reserve’s interest rate policy – leapt to a fresh high of 4.121%. It’s the highest level since October 2007.
Hawkish Fed to stay restrictive ‘all the way through’ 2025, NatWest economist says
The Fed’s interest rate projections caught some traders by surprise, in that they were much more hawkish for longer than many in the market expected.
Prior to the announcement, fed funds futures were pricing a target rate of 4.51 for fed funds after the March 2023 meeting. The Fed’s so-called “dot plot” released Wednesday shows a peak 4.6% in 2023.
“It’s really hawkish,” said John Briggs of NatWest Markets. He said the median rates are much higher than expected. “Basically they’re saying it’s front loaded but they are staying restrictive all the way through 2025.” In 2025, the fed funds rate median target is 2.9%.
“They’re basically saying rates have to go higher and faster and even if we have cuts in ’24 and ’25, they’re still going to stay restrictive into 2025. You don’t have them getting back to neutral until 2025. It’s pretty hawkish. It’s three years of tight policy.” The median fed funds forecast was still 3.9% for 2024.
— Patti Domm
Fed’s statement highlights ‘modest growth in spending and production’
The Federal Reserve’s updated statement shows that the central bank sees the U.S. economy as strong, which could indicate that the Fed is comfortable raising rates significantly from here.
The new statement said that economic indicators “point to modest growth in spending and production.” That is a change from July’s statement, which said “recent indicators of spending and production have softened.”
— Jesse Pound
Fed will boost rates to an end point of 4.6% in 2023
The Federal Reserve’s “dot plot,” its forecast for the path of rate hikes, shows that the central bank will boost interest rates up to 4.6% in 2023 before it ends its tightening campaign.
The Fed raised its benchmark interest rate by three-quarters of a percentage point to a range of 3% to 3.25%.
–Darla Mercado, Yun Li
Stocks slip following Fed’s announcement of 75 basis point rate hike
The major averages gave up their gains and traded lower after the Federal Reserve announced its 0.75 percentage point rate hike. The Dow Jones Industrial Average slipped about 240 points shortly after 2 p.m. ET. The S&P 500 dropped 0.8%, and the Nasdaq Composite lost 1%.
Federal Reserve raises interest rates by 0.75 percentage point, as expected
The Federal Reserve raised interest rates by 0.75 percentage point on Wednesday. It’s the third consecutive rate hike of that size. This increase brings the central bank’s benchmark rate to a range of 3% to 3.25%.
The central bank is raising rates as it attempts to tamp inflation. Investors have an ear out for what policymakers will say in their forecasts for the economy and the future path for interest rates.
Bond market unusually volatile ahead of Fed announcement, as traders bet on more aggressive hiking
Short-term Treasury rates surged ahead of the Federal Reserve’s 2 p.m. ET announcement, as traders bet the central bank will raise the fed funds rate next year to a peak well above current levels.
The Fed is expected to raise rates by three-quarters of a point, and that would take the fed funds rate range to 3.0% to 3.25%.
In the futures market, traders upped their bets on the rate level at which the Fed will stop hiking.
Ahead of the Fed meeting, the futures market implied fed funds would be raised to a peak 4.51% at the March 2023 meeting, according to Michael Schumacher, global head of macro strategy at Wells Fargo. On Tuesday, futures suggested that peak, or terminal rate, would be 4.50%. The Fed’s last forecast had that terminal rate at 3.8% next year.
“Normally, you wouldn’t see this kind of action before the Fed meeting,” said Schumacher.
The 2-year Treasury, which reflects Fed tightening, rose above 4% Wednesday for the first time since 2007.
The fed funds futures for December were pricing in a rate of 4.24% by the end of the year, he said. That was at 4.22% Wednesday.
The Federal Reserve is expected to hike rates by 0.75 percentage point
The Federal Reserve is expected to boost interest rates by three-quarters of a percentage point, marking the third time in a row that it’s hiking rates by that magnitude.
This move would bring its benchmark rate to a range of 3% to 3.25%, the highest level for the fed funds rate going back to early 2008.
Though the majority of market participants are pricing in a 0.75 percentage point rate increase, some are weighing small odds of a full point hike, according to the CME FedWatch Tool.
Central bankers’ outlook for the economy and the path of interest rates going forward will likely steal the show. Investors will watch for the Fed’s “dot plot” of individual members’ rate projections, as well as the “terminal rate” – the point at which policymakers think they can stop hiking.
–Darla Mercado, Jeff Cox
Yield on the 2-year Treasury pops to 4%
The yield on the 2-year Treasury note jumped to 4.006% shortly after 11:00 a.m. ET, just hours before the Federal Reserve’s decision on interest rates. This was the first time the rate on the short-term note hit 4% since 2007.
The 2-year is particularly important as it’s the Treasury note that’s most sensitive to Fed policy.
The market’s concern over the Federal Reserve’s next steps seems to be emerging in the action in the 2-year note, according to Jeff Kilburg, CEO of KKM Financial. He pointed to the sharp run-up in Treasury yields.
“What’s interesting is the inversion and with the two-year above 4%, we are really pricing that the Fed is going to be much more hawkish for much longer,” he said. “And I think that’s a mistake.”