June 17, 2022
Topics shared in this publication are:
- At its June 15, 2022 meeting, the Fed raised rates by 75bps, bringing the target range for the federal funds rate to 1.50% to 1.75%. The move was larger than the original 50bps guidance provided by Chair Powell and various Fed officials prior to their “blackout period.” However, an upside surprise for the May CPI and longer-term inflation expectations in the University of Michigan inflation expectations data prompted the larger move, which was intentionally leaked via a Wall Street Journal article just ahead of the meeting.
- Chair Powell indicated that he did not expect moves of this size to be common but communicated that a 50bps or 75bps hike was on the table for the July meeting, but that the decision would be data dependent as always.
- The Fed’s June median target rate projection moves into restrictive territory as of year end 2022 (to 3.4%, modestly above the long run neutral projection of 2.5%), and further up to 3.8% in 2023, before settling back down, though still in restrictive territory to 3.4% as of 2024.
- The Fed has commenced balance sheet reduction. Starting on June 1, 2022, they started to allow their Treasury holdings to passively decrease by $30 billion per month and Mortgage-Backed Securities (MBS) holdings to decrease by $17.5 billion per month. Those caps will move up to $60 billion and $35 billion, respectively, after three months.
- The pace of month-over-month inflation gains and trajectory of inflation expectations will be the key determinant of how aggressively the Fed tightens policy. We expect inflation to slow to 5.5% year- over-year (y/y) by the end of 2022 from the 7.0% y/y reached in December 2021.
- We think the Fed is likely to hike less than expressed in their projections based on our inflation outlook. We expect inflation to slow enough for Chair Powell and other committee members to see the “series of declining monthly inflation readings” he described at the June 15, 2022, press conference. We expect a federal funds rate of 3.0 at year-end. If inflation remains persistently high, then we expect them to follow through with their projections.