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Market’s reaction was with slight caution as the FED hiked interest rates as expected yesterday, however, they did not sound as hawkish about rate hikes as many expected.
The Federal Reserve raised the fed funds rate by 50 basis point to 4.25%-4.5% during the very last monetary policy meeting of 2022, pushing borrowing costs to the highest level since 2007.
This marked the seventh consecutive rate hike, following four straight three-quarter point increases. Policymakers reinforced that ongoing hikes in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2%.
Going forward, the Fed now expects interest rates to reach 5.1% at the end of next year, 4.1% in 2024, and 3.1% in 2025, a higher level than previously indicated.
Meanwhile, US GDP growth projections were revised higher for this year (0.5% vs 0.2%) but lowered for 2023 (0.5% vs 1.2%) and 2024 (1.6% vs 1.7%). Inflation forecasts were revised higher for 2022 (5.6% vs 5.4%), 2023 (3.1% vs 2.8%) and 2024 (2.5% vs 2.3%).
Breaking down the FED policy statement the FOMC said that “recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low.”
More dovish, they said that “Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.”
A potential nod to economic hardship was also added as they said, “The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals.”
Jerome Powell also addressed financial markets and said, “Without price stability, there is no sustained strong jobs market” and the “US economy has slowed significantly from last year”.
In general, the FOMC was positive for the US dollar and not so many stocks. Gold also sold off sharply and cryptocurrencies also did not like the news.
