Fed Hike 75bp as Expected

​The Federal Reserve has raised the Fed funds target range by 75bp, which adds up to 225bp of rate hikes this year so far.  There is still a way to go on these hikes and we are expecting another 125bp of hikes before the end of the year. However, with recession risks increasing and inflation expected to decrease rapidly in 2023, we could see the tide turn towards rate cuts next year.

As expected,  the Federal Reserve hiked rates by 75bp, taking the target range for the federal funds rate to 2.25-2.5%. In the statement they acknowledge that "recent indicators of spending and production have softened", but that "job gains have been robust". In addition, they remain "highly attentive to inflation risks" and anticipate that "ongoing increases in the target rate will be appropriate". Here are a few more quotes:

• "No one can be sure on whether we can achieve a soft landing."
• "Balance sheet reduction is working fine, markets have accepted it, and should be able to absorb it."
• "Balance sheet reduction will be picking up steam."
• "Broader financial conditions have tightened a good bit."
• "We're going to get our policy rate to level where we are confident inflation will come down to 2%."
• "We'll be watching financial conditions to see they are appropriately tight."

So where do we go from here? The probability is for a 50bp in September. This gives us almost 2 months until their next meeting on the 21st September and during that time, we'll have seen two more inflation reports, two more jobs reports and the Fed's Jackson Hole symposium. Clearly, a lot can happen in two months! 

In terms of forward guidance, Jerome Powell said that the central bank would decide monetary policy on a “meeting by meeting basis” and would not provide forward guidance as before. In addition, he said that any future rate hikes will depend on the data.

In the meantime, the Fed’s base case remains a soft landing even though there is some uncertainty around this. Indeed, this looks like it will be a real challenge to achieve in the current circumstances. The immediate priority is getting  inflation under control, and the probability for a 50bp hike at the September FOMC is very strong with further 50bp and 25bp hikes before the end of the year.