Image source: Wikipedia
 

FOMC Rate Decision Key Points:

• Federal Reserve raises its benchmark rate by 75 basis points to 3.00%-3.25%, in line with market expectations
• Policymakers downgrade their GDP estimates while revising upwards the inflation outlook
• The September dot-plot signals a more hawkish tightening path than envisioned in the June Summary of Economic Projections

After two days of intense deliberations, the Federal Reserve concluded its September meeting this afternoon. The FOMC took another aggressive step in the fight to restore price stability and opted to raise its benchmark rate by three-quarters of a percentage point to 3.00-3.25%, in line with consensus expectations. This decision, which takes the federal funds rate well past the “neutral level” and into the restrictive territory was reached by unanimous vote.

The U.S. central bank has been removing accommodation at the fastest pace since the early 1980s, delivering a total of 300 basis points of tightening since the start of the cycle in March, with a clear and unwavering goal in mind: to rein in rampant inflation. The Fed wants to achieve this part of its mandate by slowing the economy via tighter financial conditions in the form of higher mortgage, credit card, and loan rates as well as lower stock prices. Together, these variables tend to negatively affect spending, business investment, and hiring plans, leading to weaker aggregate demand. Over time, this combination of factors helps moderate inflationary pressures, although the lag is often unpredictable.

While annual CPI eased to 8.3% in August from 8.5% in July, it remained more than 4 times above the Fed’s 2% long-term target. What’s more, the core gauge advanced more than anticipated, clocking in at 6.3% from 5.9% previously amid accelerating rental costs, a sign that the price outlook remains extremely uncertain and biased to the upside.

The Fed’s front-loaded hiking regime has been responsible for the sharp rally in the U.S. dollar this year that pushed the DXY index to multi-decade highs earlier this month. The normalization process has also catalyzed a major sell-off in risk assets, from equities to cryptocurrencies, as investors have rushed to trim speculative positions amid shrinking liquidity. With the era of easy money ending, volatility is likely to remain elevated, keeping market sentiment on edge and preventing risky assets from making a lasting recovery. This means that the S&P 500 and Bitcoin are not out of the woods yet.
 

FOMC Policy Statement

The statement offered a downbeat message on economic activity, noting that spending and production indicators are showing modest growth.

On the labor market, the document stressed that unemployment remains low, acknowledging that job gains remain strong, providing a vote of confidence in the outlook.

The central bank reiterated that inflation is high, reflecting supply and demand imbalances related to the coronavirus health crisis, rising food and energy costs, and broader price pressures. In addition, the bank said it continues to be attentive to inflation risks.

On monetary policy, the FOMC maintained the same forward guidance as previous statements, indicating that ongoing increases in the target range will be appropriate, signaling policymakers are not yet done with aggressive hikes.
 

Summary Of Economic Projections

There were meaningful changes in the September Summary of Economic Projections (SEP) compared to the material presented in June. In addition, the forecast horizon was extended to include estimates for 2025. The main details are highlighted below.

Source: Federal Reserve
 

FED Dot Plot

The Fed’s so-called dot plot, which shows the trajectory for interest rates, signaled a more hawkish hiking path than contemplated a few months ago.

According to the updated diagram, officials expect to raise borrowing costs to 4.4% by December, implying about 120 basis points of additional tightening through year’s end. This reflects an upward revision of 100 bp from the material submitted in June. Participants then see the federal funds rate rising to 4.6% in 2023, 80 basis points higher than in the previous forecast. For 2024, the benchmark rate is expected to stand at 3.9%, compared to 3.4% before.
 

GDP And Unemployment

In June, the median projection for the gross domestic product was 1.7% for this and next year, and 1.9% for 2024. The central bank downgraded these forecasts and now expects GDP to expand by 0.2%, 1.2%, and 1.7%, respectively, over those three years, suggesting that the Fed is hell-bent on engineering a sustained period of below-trend growth to squash inflation.

Turning to unemployment, the new revisions were smaller but still disappointing. At present, the labor market remains extremely tight, with demand for workers far outstripping labor supply, but this imbalance will begin to correct itself in the medium-term once the Fed's front-loaded actions fully play out in the real economy. In line with that logic, policymakers raised the jobless rate for this and next year by one-tenth, to 3.8%. By 2023, the unemployment rate is seen at 4.4% versus 3.9% before.
 

Inflation

The median projection for core PCE, the central bank’s favorite inflation gauge, was boosted for 2022 and 2023 to 4.5% and 3.1% respectively. In June’s Summary of Economic Projections, the outlook for this metric stood at 4.3%, and 2.7% for these two periods.

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