The Federal Reserve (Fed) delivered a 75bps rate hike, bringing policy rates into the 3.0-3.25% band.
The Fed’s median forecasts for overnight rates:
- End of 2022 – 4.4%
- End of 2023 – 4.6%
- End of 2024 – 3.9%
- End of 2025 – 2.9%
During the press conference, Chairman Powell pointed out that they expected the unemployment rate to rise next year. He went on to say, that it was very important during a period of elevated inflation for the Fed not to ease too early. Our read is that the Fed expects a mild recession is required to bring inflation down and will not be willing to ease even after a string of disappointing economic data unless inflation is on a sharp trajectory lower.
Implications.
- Treasury yields are moving to reflect the probability of a higher terminal rate.
- Markets should continue adjusting to a very high probability of a mild recession next year.
