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Market Update

Fed remains steadfast to their rate hikes

September 21, 2022


On Wednesday, September 21, the Federal Open Market Committee (FOMC) voted unanimously to raise the federal funds target range by 75 basis points to 3.00–3.25%. This rate hike is guided by their long-term goal of stabilizing prices while simultaneously ensuring maximum employment. The Fed is committed to lowering inflation to their 2% target range – noting that a total of 100–125 basis point increase will occur in the last two meetings this year. Federal Reserve Chair Powell noted that a strong labor market and relatively low unemployment rate may mitigate the effects felt from increased rate hikes.

Key takeaways

  • The Federal Reserve unanimously voted to raise the federal funds target rate by 75 bps to a target range of 300–325 bps.
  • Balance sheet runoff program remains strong with a focus on returning inflation to 2.00% or below.
  • The board remains highly attentive to inflation pressures and noted the Russia-Ukraine war and supply shocks have added economic hardship. Powell noted that the board does not want inflation to become entrenched in the economy.
  • The Federal Reserve understands that members of the lower income spectrum are the most impacted by inflationary pressures.

FOMC recap

The Federal Reserve voted unanimously to increase the federal funds target range by 75 basis points, the third consecutive increase of this size. The Federal Reserve Board remains highly attentive to inflation but is prepared to adjust their monetary policy if new risks emerge. The Federal Reserve will remain on course with their balance sheet run off program which Chair Powell states is an important part of their monetary tightening. Despite sectors, specifically housing, seeing material impacts on interest rate increases, the U.S. economy has remained resilient. Powell noted that a strong labor market and savings remaining on people’s balance sheets may ease inflationary pressures. The board remains committed to reaching a restrictive level of monetary policy for a long period of time to lower inflation. Chair Powell stated that the board will continue with rate hikes with an aim of increasing by a total of 125 basis points by the end of the year, but did note some members of the board also leaning toward 100 basis points.

The board pointed to recent indications of modest growth in spending and production along with a low unemployment rate. This allows the Fed to comfortably continue to hike rates as the economy remains strong.

Impact on rates

The board is remaining hawkish in its approach to rate hikes and has increased their projections for the end of the year by a full percent. The board will continue to raise interest rates until they see evidence that they are putting meaningful downward pressure on inflation. Chair Powell stated that the board believes they are currently in the low end of the restrictive territory but would like to increase rates deeper into restrictive territory and remain there until they slow growth and lower inflation. Expectations for rate hikes have increased since the last Fed meeting with a peak of 4.53% compared to the curve peaking at 3.26% after the July meeting.

As seen above, interest rate cap prices are much higher than after the July Fed meeting.

The change in the expectation of the rate hikes can be seen in the graphs below. One is the Fed’s dot plot which shows the Federal Reserve Governors expectations for where rates will be and one is the 1-month Term SOFR market expectations.

Moving forward

The Federal Reserve is attentive to inflation and incoming data which could impact their monetary policy moving forward. Chair Powell stated a soft landing is unlikely and the board will continue to raise rates as much as needed in order to reduce inflation. After the meeting, the market is pricing in a greater than 62% probability of a 75 basis point hike at the November meeting. Floating-rate borrowers can expect consistent increases in interest rates in the near term with the Federal Reserve board focusing on battling inflation. Chatham focuses on helping our clients hedge their interest rate risk in numerous ways. To follow the developments of the market’s expectations of the forward interest rates visit Chatham Rates or subscribe to our newsletter below.

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