Notes from the Desk: FOMC Meeting – The Over/Under
The Federal Reserve (Fed) raised policy rates by 75bps bringing the overnight rate into the 3.75% – 4% range.
Chairman Powell reiterated that rates still need to go higher, however, given lags in monetary policy, it is appropriate to consider moving in smaller increments.
The Chairman made it clear that the risk of under-tightening was greater than the risk of over-tightening.
Simply put, if the Fed over-tightens (i.e hikes too high) they can reduce rates and even restart Quantitative Easing to boost the economy. If they under-tighten (i.e not hike enough) and inflation becomes entrenched, then much higher rates, a deep recession, and much higher unemployment will be required. He also went on to say, that it was too early to consider pausing and that rates will likely remain higher for longer.
Implications:
- The bond market continues to believe the Fed Funds rate will reach 4.75 – 5% in Q1 2023
- The risk remains that the Fed has to go higher than 5% should inflation not come down
- We expect that rates will continue to be very sensitive to employment and inflation data
