Executive summary
The Federal Reserve (Fed) raised interest rates by three-quarters of a point (0.75%), the largest increase since 1994.
The move was widely expected, but the size wasn’t, although Fed officials leaked the possibility of a three-quarter point hike to the media days before the meeting. It underscores the Fed’s nimbleness to adjust to incoming economic data, particularly hotter inflation readings. More importantly, the rate increase was a dramatic shift in action, clearly showing the Fed’s determination to aggressively address inflation.
Yesterday’s market reaction was largely positive as stocks and bonds reacted positively; however, both appear to be giving back most of those gains in early trading today.
While the U.S. economy remains on solid footing currently, intensifying inflationary pressures and dramatically higher interest rates place additional stress on consumers and businesses going forward. By Chair Powell’s own admission, a relatively narrow path exists to tighten policy in the face of intensifying inflation and still deliver a soft-ish economic landing. We agree.
What happened
At its June rate-setting meeting, the Federal Open Market Committee (FOMC) agreed to increase its target range for the federal funds rate by three-quarters of a point (0.75%) to a range of 1.50% to 1.75%. It was the largest increase since 1994 and the third increase in this cycle.
Additionally, the FOMC released its June statement of economic projections, which sees slower economic growth, a rise in the unemployment rate, and a faster improvement in inflation. Most notably, the committee dramatically upped its projections for where it expects the federal funds rate to be by year-end 2022 compared to just three months ago.
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Fed funds target, tightening cycles between 1992 and 2022, showing a mountain chart for that period. This was the third interest rate increase in this cycle, and the largest since November 1994.
