75 today, and more to come

Market expectations that the Federal Reserve would hike the funds target rate by 75 basis points today -- the largest move in almost three decades -- have proven accurate. The new funds target range is 1.50 - 1.75 percent.  The FOMC statement expresses confidence that the brief downturn in growth seen in Q1 has given way to renewed expansion, while "Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures".

The rest of the boilerplate language in the statement is little changed from earlier meetings. The key takeaways are that "The Committee is strongly committed to returning inflation to its 2 percent objective", and that "The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals".  Only one FOMC member voted for a smaller (50 basis point) hike. 

The accompanying set of economic projections show some significant changes in the FOMC's outlook compared to just three months ago. The median projection for real GDP growth in 2022, at 1.7 percent, is more than a percentage point lower than the March projection, and expected growth rates for both 2023 and 2024 have also been revised lower. In effect, the Fed appears to be expecting growth to stabilize close to its estimated longer-run potential, which may bode well for prospects of getting inflation back to target. 

As for inflation, the median projection for the PCE (personal consumption expenditure) deflator in 2022 is now 5.2 percent, up from 4.3 percent in March. However, the FOMC still appears confident that PCE inflation will fall rapidly after this year: projections of 2.6 percent and 2.2 percent for 2023 and 2024 respectively are almost identical to the March figures. It should be noted that the more widely-followed CPI figures tend to track higher than PCE, so these projections do not suggest that headline inflation will be back to the 2 percent target until late 2024 at best. 

The most startling change in the Fed's economic projections relates to its interest rate outlook. The Fed funds rate projected for 2022 is now 3.4 percent, up fully 150 basis points from the March projection. A further rise to 3.8 percent is expected in 2023, before some relief arrives in 2024. These figures are all higher than recent estimates of the "neutral" funds rate, which have generally been in the 2.5-3.0 percent range. 

Taken together, all of this implies that the Fed believes it can continue to thread the needle policy-wise, raising rates enough to bring inflation down while keeping the economy out of recession. This points to further outsize increases in the funds target in the coming months. The goal is to keep inflation expectations in check while waiting for relief from the supply chain issues that are the main drivers of the ongoing inflation spike.