U.S. Federal Reserve Board Chairman Jerome Powell speaks during a news conference following a meeting of the Federal Open Market Committee on 21 September 2022. AFP.
U.S. Federal Reserve Board Chairman Jerome Powell speaks during a news conference following a meeting of the Federal Open Market Committee on 21 September 2022. AFP.
This month’s Federal Reserve (Fed) meeting was hawkish. 10Y Treasury yields surged to 3.82%, their highest level since 2010. The S&P 500 fell close to its lows for 2022 and the safe-haven USD strengthened further.
Faced with inflation at 8.3% and unemployment near 50-year lows of 3.7%, the Federal Open Market Committee (FOMC) signalled its intent to keep cooling the US economy through rapid rate hikes and return inflation to its 2% target.
Firstly, the Fed raised its fed funds interest rate by 75bps for the third meeting in a row - as the chart shows from neutral ‘longer-run’ levels of 2.25-2.50% that the FOMC estimates neither stimulates nor curbs activity to 3.00-3.25% to restrict growth and lower inflation.
Secondly, the FOMC revised its forecasts markedly. The median or average projection for the peak in the Fed’s rate tightening cycle was raised sharply to 4.50%-4.75% by early 2023 and the forecasts for next year showed no rate cuts. FOMC officials anticipate higher interest rates will reduce US growth and cause significant job losses. Thus, the FOMC forecasts now project US GDP will only expand by 0.2% in 2022 and 1.2% in 2023 and unemployment will rise from 3.7% currently to 3.8% by the end of this year and 4.4% next year. Even then, inflation using the Fed’s preferred measure of core prices, is only forecast to fall to 4.5% in 2022, 3.1% in 2023 and 2.3% in 2024, thus remaining above the Fed’s 2% target.
Source: Bank of Singapore, Bloomberg.
To keep lowering inflation, we think the Fed will now hike again by 75bps in November, 50bps in December and 25bp in February to bring its fed funds rate up to 4.50-4.75%. This will have the following implications for investors:
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