The Federal Reserve moved to raise the Fed Funds rate by 50 basis points to a target of 4.25% to 4.50%. The move was well telegraphed by the Fed and completely anticipated by the markets. The move follows four consecutive 75 basis point hikes, and means that the Fed ends 2022 with a full 425 basis points of rate hikes (having begun its hikes from a rate of 0 to 25 bps earlier in the year).
The Fed’s hawkishness caught markets on edge after a presentation by Powell indicated that inflation was decelerating and led many market participants to believe that the Fed can slow its actions.
Rather, Powell has been very clear. Multiple, ongoing rate hikes will be appropriate. While he says that he and the Fed haven’t made a judgment about whether a 25 or 50 basis point hike in February will be appropriate, the consensus is that the Fed needs to get to a final (or terminal) rate much higher than had been previously estimated.
The new target terminal rate for later is 2023 is 5.10%, with 17 of 19 FOMC participants believing that the peak rate will be over 5%. In fact, several Fed officials see 2023’s rate at 5.40% or higher.
Powell and the Fed are fully committed to getting the core inflation rate down to 2% as quickly as possible. They are clearly deeply concerned about the burden on the lower and middle classes of an inflation scenario that continues to significantly affect housing, basic food and transportation costs across the board. He hopes to see this inflation be brought down to 3.50% by the end of 2023 at which point the Fed will begin to consider a shift in its policy.
There is clearly a debate among economists about whether the 2% inflation target in reasonable or attainable within the next several years. There is a risk that Powell’s Fed will break the economy in order to attain this goal. However, for the moment, it seems that the Powell Fed is going to be true to its goal of price stability in 2023, and that we will see higher savings rates and CD rates.
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