The Fed vows vigilance against inflation after another 75 basis point rate increase.
The FOMC increased the federal funds rate 75 bps for the second month in a row.
The Fed is on track to increase rates to the 3.00%-3.50% range by the end of 2022.
Fed Chair Powell: "I do not think the U.S. is currently in a recession."
The Federal Open Market Committee (FOMC) cited “softened” indicators of spending and production as it announced a 75 basis point (bps) increase Wednesday, July 27. This aligned with market expectations – although those expectations fluctuated between 75 and 100 bps in the weeks leading up to the meeting. “We need to get economic growth below potential in order to give the supply side time to recover and to bring inflation down,” said Fed Chairman Jerome Powell.
“Weaker consumer demand could help the Fed start to make progress on the inflation front,” said Raymond James Chief Economist Eugenio J. Alemán, Ph.D.
As expected, the Fed lifted the fed funds rate 0.75% to 2.25% to 2.50%. This is considered neutral (the rate deemed to neither stimulate nor restrict the U.S. economy) territory. This is the Fed’s fourth interest rate hike in this tightening cycle dating back to its first hike that began March 16.
“The Fed appears to be on pace to increase rates to a mildly restrictive level of 3.00% to 3.50% by the end of the year,” said Alemán.
This is the Fed’s second consecutive 75 bps increase, following the historic hike in June. As has been the case over the last four FOMC meetings, the Fed maintained its transparency and delivered what the market was expecting with no surprises. Chairman Powell continued to assuage economic concerns, suggesting that the economy is not in recession, the Fed will remain vigilant against inflation and that the pace of these “unusually” large interest rate hikes will end at some point.
Powell made it clear that the Fed will rely on data to adjust the path of rate increases as needed. With that data in mind, Alemán reminds investors to focus on the long term amid the short-term flood of information. “We expect upcoming data releases, such as GDP and personal consumption expenditures, to be very noisy,” said Alemán.
As has been the case during this tightening cycle, the equity market (S&P 500) welcomed the news and rallied by 2.6%. The previous three times the Fed raised interest rates – March 16, May 4 and June 15 – the S&P 500 rallied 2.2%, 3.0% and 1.5%, respectively.
This material is being provided for informational purposes only. Expressions of opinion reflect the judgment of the Chief Investment Office, are provided as of July 27, 2022 and are subject to change. Any information should not be deemed a recommendation. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the economy, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. There is no guarantee that the statements, opinions, or forecasts provided herein will prove to be correct. Past performance does not guarantee future results. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. An investment cannot be made directly in the index. The performance mentioned does not include fees which would reduce an investor’s performance.