Market Wire - Federal Reserve Hikes 75 Points, Reaction Muted in Well-Prepared Markets

The Federal Reserve stomped on the accelerator pedal this afternoon, raising interest rates by the most since 1994. At the conclusion of its two-day meeting, the Federal Open Market Committee voted to raise the target range for the federal funds rate to 1.50 to 1.75 percent, with one dissent - the Kansas City Fed’s Esther George - in favour of a 50 basis point move.

The Fed typically prefers to move in 25 basis point increments, and last increased rates by more than 50 basis points in 1994. 

Two pieces of data, both released on Friday, appear to have triggered a departure from the central bank’s typically-meaningful forward guidance framework. Consumer prices rose a searingly-hot 8.6 percent in the year to May, and a University of Michigan survey showed consumer price expectations becoming untethered - anathema to a generation of central bankers scarred by the wage-price spirals of the 1970’s. 

According to the accompanying Statement of Economic Projections, officials now expect headline personal consumption expenditure price index to rise 5.2 percent this year before fading to 2.6 percent next year. Unemployment is seen rising from 3.7 percent this year to 4.1 percent in 2024, and growth is thought likely to decelerate, with output expanding only 1.7 percent in the next two years, down from the 2.8 and 2.2 percent rates previously expected.  

The benchmark federal funds rate is expected to hit 3.4 percent by the end of this year (implying another seven 25-basis-point moves), before peaking next year at 3.8 percent,  and falling to 3.4 percent in 2024. Forecasts released in March showed rates touching 1.9 percent in 2022, and 2.8 percent in 2023. 

Markets, rattled by rapidly-tightening financial conditions, bounced upward in the moments after the release. US equities jumped, two- and ten-year government bond yields moved sideways, and the dollar steadied, holding this morning’s losses. 

Markets are now shifting to the press conference, where Jerome Powell will try to balance an overtly-hawkish policy outlook with a return to the gradualist policy implementation process that has been the hallmark of his time as Chair. We wish him luck.