Federal Reserve expects a peak of 4.6%


The Federal Reserve raised its key interest rate by 75 basis points on Wednesday, suggesting much more to come. Policymakers’ quarterly projections show Federal Funds interest rates rising to 4.6% next year. The Dow Jones industrial average remained volatile, swinging lower then higher and then lower again after the Fed meeting’s policy statement.


The Fed’s third consecutive 75 basis point hike raised the key interest rate, the overnight interbank rate, to a range of 3% to 3.25%.

Outlook for Federal Reserve rate hike

Federal Reserve policymakers now see the Fed’s policy rate rise to 4.4% by the end of 2022, according to new quarterly forecasts released along with the policy statement. That means a total of 5 more interest rate hikes by a quarter point, during the November and December meetings.

However, that forecast represents the median projection of all 19 Fed policymakers. Fed chief Jerome Powell noted that there is no broad consensus, with a number of policymakers seeing the possibility of a slightly smaller increase of one percentage point by the end of the year. So stay tuned.

The Fed forecasts that the key policy rate will peak at 4.6% in 2023, with 12 out of 19 policymakers forecasting rates at least that high.

Forecasts show that the Fed’s key rate will be cut to 3.9% by the end of 2024.

The projections to 2023 are broadly in line with financial market expectations, but are slightly more aggressive. Ahead of the Fed’s policy statement, markets are estimating the 62% chance that the Fed would rise to 4.25%-4.5% by the end of the year, according to the CME Group’s FedWatch page.

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Markets see an odd chance that the Fed will hike again in 2023, to a range of 4.5%-4.75%, with a target range of 4%-4.25 by the end of the year.

The Fed also introduced rate guidance for 2025. While the key rate falls to 2.9%, it is still somewhat restrictive.

The Fed’s forecasts imply that rate cuts will be on the table once the Fed’s chosen measure of core inflation falls to around 3%. Powell also said federal fund rates would eventually turn positive in real terms, ie higher than inflation.

Fed Chair Powell speaks about US recession

“Nobody knows if this process will lead to a recession,” Powell said at his post-match press conference. But he added that “the chances of a soft landing are reduced” by the need to keep policies tighter for a longer period of time.

He also spoke of a “difficult correction” needed to rebalance the housing market.

Powell said, however, “The historic record warns against premature policy easing.”

In other words, the Fed is guided by the experience of the 1970s, when policymakers repeatedly cut interest rates as unemployment rose, only to see inflation flare up again. Even if the unemployment rate rises and the economy faces a recession, the Fed won’t cut until inflation falls convincingly to 2%.

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That reflects the message of Powell’s Jackson Hole speech, which shook the Dow Jones awake.

The new projections show that GDP growth is slowing much more sharply, to 0.2% this year and 1.2% next year. Fed officials now expect the unemployment rate to rise to 4.4% in 2023 and remain there until 2024. That compares with the unemployment rate of 3.7% in August and 3.5% in July. Every time the unemployment rate has risen by more than half a percentage point, the U.S. economy has entered a recession.

Jackson Hole Redux

Powell’s August 26 speech kicked off a market review of the Fed’s policy outlook, overturning the subdued impression he made at his July 27 press conference that had helped the Dow Jones cut its losses by more than half. made, and increased by 14% in the summer.

My main message hasn’t changed at all since Jackson Hole,” Powell said. That was a signal to the financial markets not to see the glass as half full.

August’s hot CPI reading provided another big shock. While headline inflation fell to 8.3%, prices for core services such as rent, healthcare and transportation rose 0.6% from a month ago and 6.1% from a year ago, the fastest pace since February 1991. The message: A distant – too strong labor market still keeps inflation far too high.

Dow Jones, Treasury Yield Response

After the Fed meeting ended, the Dow Jones reversed modest gains and rebounded as Powell spoke. But the Fed’s aggressive message got through to him as Powell left the stage. In late afternoon stock market action, the Dow Jones fell 1.7%. The S&P 500 also lost 1.7%, while the Nasdaq lost 1.8%.

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During Tuesday’s session, the Dow Jones Industrial Average is down 16.6% from its high, placing it just 2.7% above the June 52-week close. The S&P 500 was 19.6% below its January 3 closing high, but still 5.2% above its June 16 low. The Nasdaq composite is down 29.85% from its record high, but remains 7.3% lower than the June bottom.

Be sure to read IBD’s The Big Picture column after each trading day to get the latest on the prevailing stock market trend and what it means for your trading decisions.

Ten-year government bond yields, which closed Tuesday at 3.57% to an 11-year high, fell back to 3.51% after the Fed meeting. But the 2-year yield, which hit 4% for the first time since 2007 earlier on Wednesday, rose 7 basis points to 4.03%.


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