Federal Reserve Raises Rates Another 50 bps, How High Will They Go?

As expected, the US Federal Reserve raised benchmark interest rates by 50 basis points bringing the target range for the federal funds rate to 4-1/4 to 4-1/2 percent. The vote for 50 bps was unanimous. This is the 7th interest rate increase in the past year.

The Fed reiterated its objectives of maximum employment and inflation at 2%. The Fed is expecting a terminal rate of 5.1%.

The Fed stated:

“The Committee anticipates that ongoing increases 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 percent over time. In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve’s Balance Sheet that were issued in May. The Committee is strongly committed to returning inflation to its 2 percent objective.”

Markets tanked on the news following the previous day’s rally when CPI came in lower than anticipated.

Observations on the Fed’s move and what is next are mixed, but clearly, the FOMC is determined to crush persistent inflation – even if it leads to a significant rise in unemployment. Some believe Fed Chair Jerome Powell and crew have already overshot the target and should stop raising rates, others expect a more muted pace of rate increases in 2023.

For a more positive spin, Wharton Professor Jeremy Siegel predicts that after the Fed realizes it has stomped out inflation and will halt rate increase while stocks will rally by 15% in 2023. Siegal is of the camp the Fed has already raised rates too much.

 

 

 

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