The much-awaited Federal Reserve decision is behind us. The Fed decided to hike the funds rate on Wednesday by another 50bp, bringing it to 4.5%.
It was all priced in, just like the outcome of other central banks due to deliver their monetary policy decisions this week. But because the Fed leads in this tightening cycle, the details mattered.
After the inflation report released last Tuesday, it was all but certain that the Fed will slow down the path of its interest rate hikes to 50bp. Still, a 50bp rate hike is historically big, showing the Fed’s relentlessness in fighting inflation and fulfilling its price stability mandate.
Here are four takeaways after Wednesday’s Fed hike:
- Fed signals a higher terminal rate
- The unemployment rate is seen rising in the years ahead
- GDP growth projection revised down in 2023
- Fed is worried about inflation persistence
The market is interested in the dot plot whenever the Fed publishes its economic projections. It shows how the FOMC members view the future path of interest rates, and it usually moves markets.
On Wednesday, the dot plot implies another 75bp of tightening in the coming months. The terminal rate of the current tightening cycle is seen at 5.1% in 2023, and then the funds rate should gradually come down to 4.1% in 2024 and 3.1% in 2025.
It is worth noting that funds rate expectations for 2023, 2024, and 2025 were revised higher.
Unemployment rate to rise in the upcoming yearsThe Fed has a dual mandate – job creation and price stability. Therefore, in fighting inflation, it must consider the job market too.
But despite the Fed seeing a higher terminal rate in 2023, the unemployment rate is seen rising to 4.6% from 4.4% in both 2023 and 2024.
GDP growth projections revised down in 2023Besides reduced employment, the Fed also sees slower activity. The GDP growth projections were revised down n 2023 and 2024.
Fed is worried about inflation persistencePersistent inflation is what keeps the Fed vigilant. The Core PCE inflation was revised higher to 4.8% in 2022 from 4.5%, 3.5% in 2023 from 3.1%, and 2.5% in 2024 from 2.3%.
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