Executive summary
The Federal Reserve (Fed) raised interest rates by three-quarters of a point (0.75%), an unprecedented third straight supersized move.
Given a parade of Fed officials publicly supporting a hike of 0.75% in the preceding weeks, the size of this move was widely expected. More importantly, Chair Powell clearly reiterated that taming inflation is the Fed’s overarching focus, even if that results in a recession.
Markets traded in an erratic fashion after the release of the FOMC minutes and Chairman Powell’s press conference before taking a decidedly more risk-off turn. A sharper inversion of the yield curve indicated intensifying economic growth concerns, which also weighed on stocks.
Ultimately, given the lags between the Fed’s rate moves and their impact on the U.S. economy, recession risks are heightened. Our view is that a U.S. recession is increasingly likely due to tightening financial conditions as dramatically higher interest rates place additional stress on consumers and businesses going forward. In other words, we’re landing whether it’s soft-ish or not. Accordingly, we continue to advocate for more defensive and up-in-quality portfolio positioning, across both equities and fixed income.
What happened
At its September rate-setting meeting, the Federal Open Market Committee (FOMC) unanimously agreed to increase its target range for the federal funds rate by three-quarters of a point (0.75%) to a range of 3.00% to 3.25%. This was the fourth increase in this cycle¾the third straight supersized move¾pushing the target rate up 3% in roughly six months. That said, the starting point of essentially zero is similarly unprecedented.
Additionally, the FOMC released its September statement of economic projections, which sees slower economic growth, a sharper rise in the unemployment rate, and a slower improvement in inflation compared to the June projections. Most notably, the committee dramatically upped its projections for where it expects the federal funds rate to be by year-end 2022—1.25% higher—from just three months ago. However, the so-called dot plots show that a fairly large portion of the FOMC only see lifting rates by one percentage point (1.00%) by year end, which Chair Powell stressed during the post-meeting press conference.
Chair Powell gave a full-throated declaration that inflation must be the Fed’s overarching focus. He clearly stated that there will “very likely be some softening in the U.S. labor market” and a “high likelihood of a sustained period of below-trend growth.” He also noted the FOMC was “committed to getting to a restrictive level of the federal funds rate and getting there quickly.”
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Chart shows the series of moves the Fed has made in interest rates since 1992. In 1992 the rate was 3%. By 2000 the rate had inched up to about 6.5%. Then rates went up and down until 2008 when the rates bottomed out and stayed that way until 2014. From 2014 to 2018 rates crept up to just over 2% and then tumbled back down in 2019-2021. Heading back up again in early 2022. The anticipated high by the end of this year is 4.25%