Client Question: Wait, another rate hike?

July 29, 2022

A client asked for a debrief on the Federal Reserve’s actions. Here we go!

What happened at the meeting?

On July 27, 2022, the US Federal Reserve (the “Fed”) once again raised the Fed Funds Rate by 75 basis points. The Federal Funds Rate now ranges from 2.25-2.5%, up from near zero in March. This move (the fourth such one this year) was in line with market expectations and did not come as much of a surprise.

The Fed has a dual mandate – maximum employment and stable prices. With the labor market remaining very strong, this rate move (and the ones that came before it in 2022) have been in response to persistent inflation. This rate increase brings the Fed Funds rate up to its neutral position – one that the Fed believes is low enough to support a growing economy but high enough to limit inflation to ~2% over the long run.

The Fed is also continuing its “quantitative tightening” (QT) program—reducing the size of its balance sheet by letting bonds it holds mature without reinvestment. The pace of QT will begin to pick up in September as the Fed allows more bonds to “roll off” its balance sheet

What else was communicated?

During his press conference, Federal Reserve Chair Jerome Powell acknowledged a slowdown in the economy – in part due to the recent rate hikes. However, he also stated that despite that cooling down, he did not believe the US economy was in a recession at this time (largely due to the strength in the labor markets).

A key item in his commentary was the messaging that the Federal Reserve would remain data dependent from here, an indication that they will respond to signs of slowdown/cooling inflation (which can lurk beneath the surface as we note in this blog post)

Are they done yet?

Not likely. While the Fed will stay data dependent as noted above, they did signal ongoing increase thru 2023 and the market is presently pricing in a Fed Funds rate of 3.4% by February 2023. However, with the focus on inflation, any change in those metrics could alter the pace and magnitude of future increases

How did markets react?

Markets rallied considerably on the news into the close, with the S&P 500 rising almost 3% to end the trading session on July 27 (and continued to rally on July 28 as I finish this post). But as you well know, some days are better than others so we will have to wait and see where things go from this point on. But initially, markets took this in stride. Markets are getting visibility and certainty about the likely path for rates – and that is clearly a welcome relief.

Where can I learn more?

Curious as to what is driving these increases and the impact they have on you? You can read all about it in our recent blog post on that very subject here

Thanks for the question – keep ’em coming!

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