Fed Raises Interest Rates 0.75 Percentage Points, Planning Further Hikes In 2022 And 2023

In its first meeting since July, the Federal Reserve (Fed) raised rates 75bps as markets broadly expected. It was a consensus decision, with all policy-makers voting for the move. The overall language of the decision was little changed, anticipating a path of rising rates in future meetings and a commitment to fight inflation.

However, the language regarding the U.S. economy was more upbeat moving from a description of a softening of the U.S. economy in July to one of “modest growth” in this September’s announcement. This perceived economic improvement, likely frees the Fed hands for further hikes.

Economic Projections Show More Hikes

The Fed updated its economic projections for the first time since June. Most policy-makers believe rates will end 2022 in a 4% to 4.5% range. That implies further rate hikes at the remaining two meetings of 2022, though at a less aggressive pace than in recent meetings.

This is broadly in line with market expectations, where the end of year rate is expected to be most likely 4.25% to 4.5%. So the market may see an extra 25bps move in 2022 than the Fed does currently, but the perspectives are not too different.

Differences In 2023

However, for 2023, the Fed expects rates to rise closer to 5%, signaling perhaps another 50bps of hikes for the year in aggregate. The market views that as less likely, believing that the Fed will more likely cut rates, or hold them steady for 2023 in aggregate.

That said, the financial markets do see a broad range of outcomes for 2023, but only imply about a 1 in 6 chance of the path the Fed currently envisions. However, if the Fed holds its nerve that may be bad news for financial markets, which are taking the view that we are likely just a few months from the peak of the current interest-rate cycle.

Meeting Minutes Expected October 12, Next Meeting November 2

We can expect to see the more detailed minutes from this Fed meeting on Wednesday Wednesday, October 12. This may yield further insight into the Fed’s decision process and future plans. The Fed is scheduled to meet and set rates again on November 2.