The Federal Reserve Open Market Committee (FOMC) lifted the federal funds rate to the 1.5% to 1.75% range and announced a continuation of its balance sheet runoff.
The Fed updated its language to reflect greater economic momentum, stating that “overall economic activity appears to have picked up after edging down in the first quarter. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures.”
The Fed’s Summary of Economic Projections was updated from March:
- The median projection for real GDP growth was downgraded in 2022 (1.7% from 2.8%). The forecast for 2023, 2024, and the longer run came in at 1.7%, 1.9%, and 1.8% (from 2.2%, 2.0%, and 1.8%), respectively.
- The median unemployment rate forecast 3.7% (3.5%) for 2022, 3.9% (3.5%) for 2023, and 4.1% (3.6%) in 2024. The longer-run estimate of the unemployment rate stayed the same at 4.0%.
- On inflation, the median estimate for core PCE was assumed to be 4.3% in 2022, 2.7% in 2023, and 2.3% in 2024.
- The median projection for the fed funds rate was lifted to 3.4% in 2022, 3.8% in 2023, and 3.4% in 2024. The long-run neutral rate was assumed to be 2.5%.
All of the members of the FOMC voted in favor of the decision, except Esther George who preferred a 50 basis point hike.
Key Implications
The Fed put the pedal to the metal on its rate hiking cycle, as inflation shows no signs of abating. Fed members upgraded their outlook for near-term inflation, which coincided with a big increase in their expectations for the path of the fed funds rate over this year and next.
This decision was expected by markets, but the increase in members’ willingness to hike rates well beyond neutral over the next few meetings is undoubtedly hawkish. This closely aligns with market pricing over the rest of 2022, justifying the level of U.S. Treasury yields, which have converged around the 3.5% level.
