Brian Torgerson

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Fed gets aggressive on inflation with 75 basis point rate hike

The Fed changed its tone at the June meeting with a 75 basis point rate hike, said Chief Economist Eugenio J. Alemán, Ph.D.

 

Video recorded June 16, 2022.

  • The FOMC increased the federal funds rate 75 bps, the largest increase since 1994.
  • The Fed has changed its tone, taking a more assertive policy stance regarding its commitment to bring inflation down to the 2% target.
  • This new policy stance certainly increases the probability of a recession in 2023.

Members of the Federal Open Market Committee (FOMC) decided to increase the federal funds rate by 75 bps on June 15, 2022, in what was a fast change of heart after the worse than expected CPI numbers for May released on Friday, June 10. This was the largest increase in the federal funds rate since 1994.

The FOMC statement included a sentence that seems to respond to some media outlets and analyst commentaries second guessing the commitment by the Fed to bring down inflation. The sentence goes like this: “The Committee is strongly committed to returning inflation to its 2 percent objective.” This was a big change from the previous statement which read “With appropriate firming in the stance of monetary policy, the Committee expects inflation to return to its 2 percent objective and the labor market to remain strong.” Thus, instead of the Committee taking a more passive stance, today’s sentence said that they will take measures to bring down inflation.

The decision, however, was not unanimous, as Esther L. George, the president and chief executive officer of the Federal Reserve Bank of Kansas City, preferred that the Fed increase the target rate by 0.5% rather than 0.75%.

With this move, the Federal Reserve has quickly taken the federal funds rate much closer to the neutral rate. The fed funds rate now stands at 1.50% to 1.75% and markets now expect the FOMC to increase the fed funds rate by another 75 bps during the July meeting. That will put the federal funds rate at a level of 2.25% to 2.50%, which is considered neutral. Before Friday’s CPI report, the expectation was for the Fed to hit the neutral rate by September of this year.

During the press conference, the Chairman of the Federal Reserve Jerome Powell indicated that 75 bps should not be considered common and the Fed will consider future moves depending on incoming information.

Economic projections from the FOMC have changed considerably since March. The federal funds rate projection in March for the end of this year was 1.9%. However, today’s forecast is for the federal funds rate to be at 3.4%, a very large increase. For 2023, the FOMC projection is for the federal funds rate to be 3.8% and for 2024 3.4%.

In terms of GDP growth, the projections for 2022 are now for 1.7% growth compared to 2.8% in March’s projection. For 2023 the projection for GDP is also 1.7% while for 2024 it is 1.9%, these projections also came down from 2.2% and 2.0%, respectively.

However, there is heightened uncertainty for economic projections for 2023 as the range for economic growth (GDP) went from 0.8% to 2.5%.

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