March FOMC Meeting: Forecasting Two Years of Rate Hikes

QUICK LOOK:

• Federal Reserve announces a raise in interest rates to a new range of 0.25% to 0.50%, up a quarter on the range (in line with market expectations).
• Federal Reserve anticipates ongoing increases to the Federal Reserve funds rate.
• Federal Reserve expects to perform balance sheet reduction, quote, “at a coming meeting”, though they did not specify what meeting.
• Fed: “We are prepared to adjust rates ‘as needed’ relative to risk in the economy.”
• FOMC voted 8-1. St. Louis Fed President James Bullard dissented the decision, preferring a 0.50% rate increase (first dissent since 2020).
• Median Fed official sees 7 rate hikes in the year 2022, up to 1.88% — that’s about one rate hike for every Fed meeting this year.
• Further hikes forecasted for 2023 and 2024, bringing the Federal funds rate up to 2.88% in 2024.
• Fed hikes 2022 inflation outlook to 4.3%, an increase of 1.7%.
• Fed: “Inflation remains elevated, caused by supply and demand related factors as well as the Ukrainian invasion. Implications of the invasion for the US economy are highly uncertain, however it is likely to create upward pressure on inflation.”
• Fed: “Indicators of the economy have begun to strengthen. Job gains have been strong.”
• Key Information: Median Fed official is expecting to raise the funds rate above the neutral rate of 2.4%.

Majority of Fed officials see 7 rate increases in 2022

— Market Rebellion (@MarketRebels) March 16, 2022

The market responded quickly, with $SPY (SPDR S&P 500) immediately giving up its gains for the day, and briefly dropping into negative territory.

Fed sees inflation of 4.3% by end of 2022

— Market Rebellion (@MarketRebels) March 16, 2022

Treasury yields all hit multi-year highs with the US 10 Year Note rising as high as 2.24% (up over 8 bps). The US 2 Year Treasury Note had an equally impactful surge immediately following the meeting — jumping 12 bps to 1.99%.

Chart Courtesy of CNBC

Overall reaction has been mixed. Some investors have come out in support of the Fed’s move, believing this is exactly what the market needs to combat the rise in inflation. 

Others have opposed the move for fear that doing “too much, too fast” will lead the economy into a recession. 

Though the Fed’s notes underscore the growing economic strength and consistent progress on unemployment, it’s likely that the Fed is not worried about the potential for an economic recession.

Fed Chairman Powell Speaks

Following the FOMC decisions, Fed Chairman Jerome Powell said “The time for raising rates and shrinking balance sheets has come”.

He explained that “No one is certain where our economy will be a year from now”, but the Fed would “continue using its tools” to combat inflation and potential economic headwinds as necessary.

Jerome Powell on the probability of a recession: 

“In my view, the probability of a recession in the next year is not particularly elevated. Aggregate demand is currently strong and most forecasters expect it to remain so. If you look at the labor market, also very strong. Conditions are tight, and payroll job growth is continuing at very high levels. Household and business balance sheets are strong. And so, all signs are that this is a strong economy. Indeed, one that will be able to flourish in the face of less accommodative monetary policy.”

Fed's Powell says US economy remains very strong

— Market Rebellion (@MarketRebels) March 16, 2022

Following Powell’s statement about the low likelihood of a recession and strength of the economy, stocks began roaring back to retake their previous day’s gains.

The Dow Jones Index ($DJI) rose 1.01% after briefly dipping negative. The S&P 500 rose 1.62%, and the Nasdaq Composite rose 2.94% by 3:22PM EST, the time of writing. At the same time, the US 2-Year Note gave up some of it’s gains, though remained modestly elevated for the day, at 1.938%.