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Sunday, September 18, 2022

FOMC Preview: 75bp Hike

by Calculated Risk on 9/18/2022 09:37:00 AM

Expectations are the FOMC will announce a 75bp rate increase in the federal funds rate at the meeting this week, although some analysts think a 100bp rate increase is possible.

From Merrill Lynch:
"We think the Fed will read the incoming data as justifying another large 75bp rate hike, bringing the target range for the federal funds rate to 3.0-3.25%. We think the Fed will signal a terminal funds rate of 4.0-4.25% early next year, 37.5bp higher than in June. We expect the FOMC statement to say that monetary policy will be moving into restrictive territory and the committee expects it to remain there “for some time”, similar to the tone of Chair Powell’s remarks at Jackson Hole. In the press conference, Powell is likely to emphasize that the “overarching goal” of monetary policy is the restoration of price stability, even if doing so requires a hard landing. Updated projections are likely to send a similar message, with less growth, higher unemployment, and a more restrictive policy stance suggesting the window to a soft landing has narrowed further."
From Goldman Sachs:
"We have raised our fed funds rate forecast by 75bp over the last two weeks, and now expect that the FOMC will hike by 75bp in September, 50bp in November, and 50bp in December to reach our terminal rate forecast of 4-4.25% by the end of 2022."
Analysts will be looking for comments on the size of future rate hikes.

Projections will be released at this meeting. For review, here are the June projections

In June, most participants expected thirteen 25bp rate hikes in 2022. The FOMC raised rates 25 bp in March, 50 bp in May, 75 bp in June and 75 bp in July.  It now appears there will be sixteen 25bp rate hikes this year.

Wall Street forecasts have been revised down further since June due to the ongoing negative impacts from the pandemic. the war in Ukraine and financial tightening, and the FOMC will likely revise down their GDP projections.   For example, from Goldman Sachs:
"We still forecast GDP growth of +1.1%/+1.0% in 2022Q3/Q4 and 0% GDP growth in 2022 on a Q4/Q4 basis, but now expect GDP growth of ... +1.1% in 2023 on a Q4/Q4 basis"
GDP projections of Federal Reserve Governors and Reserve Bank presidents, Change in Real GDP1
Projection Date202220232024
June 20221.5 to 1.91.3 to 2.01.5 to 2.0
1 Projections of change in real GDP and inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated.

The unemployment rate was at 3.7% in August. So far, the economic slowdown has barely pushed up the unemployment rate.

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents, Unemployment Rate2
Projection Date202220232024
June 20223.6 to 3.83.8 to 4.13.9 to 4.1
2 Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

As of July 2022, PCE inflation was up 6.3% from July 2021. This was below the cycle high of 6.8% YoY in May. Analysts are expecting inflation to decline slowly, but the Q4 2022 year-over-year change will likely be revised up.

Inflation projections of Federal Reserve Governors and Reserve Bank presidents, PCE Inflation1
Projection Date202220232024
June 20225.0 to 5.32.4 to 3.02.0 to 2.5

PCE core inflation was up 4.6% in July year-over-year. This was below the cycle high of 5.3% YoY in February.  

Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents, Core Inflation1
Projection Date202220232024
June 20224.2 to 4.52.5 to 3.22.1 to 2.5