Fed's 75bps Takes Markets on Rollercoaster Ride

The 3/4 of 1% (75 basis points [bps]) rise in interest rates from the Federal Open Market Committee (FOMC) came through as expected, raising the Fed funds rate to a range of +3.00-3.25%. Details within the Fed’s report, however, sent market indices sharply lower moments after its release, with an update to the “dot plot” from June rising interest rates overall amounting to a sharply raised median +4.4% by the end of the year, up from the prior level of +3.4%.

This 100 bps rise in expectations from the Fed itself accounted for a major negative surprise in real time, though perhaps it shouldn’t have. After all, +3.4% for full-year 2022 would have meant only one more quarter-point hike over the course of the final two FOMC meetings for the year. At 4.4% — representing a 4.25-4.50% range overall — the Fed is now implying one 75 bps hike and one 50 bps hike. That’s perhaps a bit higher than markets were projecting, but not all that much higher.

Further on in the Fed’s projections today, for 2023 the median forecast for Fed funds is +4.6%, which implies a 25 bps hike for the entire year (though again up, from +3.8% projected in June), then a loosening down to +3.9% in 2024 and +2.9% in 2025. It is at that point, the Fed currently feels, that the economy will hit the +2% inflation target. While 75 bps for September of this year was a unanimous decision, 10 Fed members project these interest rate numbers will come down lower than the median over this forward-looking chart.

Once Fed Chair Powell took the podium following the report’s release and explained that these moves will continue to be “data driven,” markets shot back up not only into positive territory, but to session highs. This was short-lived, however, as the Fed Chair remarked his general view “has not changed since Jackson Hole,” when a forcefully hawkish Powell virtually killed a near-term rally in the markets that the worst from the Fed was hopefully over.

While Powell said the Fed remained “strongly committed to bringing inflation back to its +2% goal,” he cited the “labor market continues to be out of balance… and remains extremely tight.” He also acknowledged the housing sector has “weakened significantly” with consumer spending and fixed investment dutifully moving lower, but said the Fed would continue increasing rates and reduce its balance sheet until there is “compelling evidence inflation has come down.”

Long story short, we’re now at session lows at the close of the trading day. Three of the four major indices dropped in lock-step, with the Dow, S&P 500 and Nasdaq slipping -1.70%, -1.71% and -1.79%, respectively. It’s another -544 points for the blue-chip Dow 30 and -204 points for the Nasdaq. Don’t look now, but those mid-June lows are now on the radar screen.

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