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FOMC Preview: 75bp Hike

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by Calculated Risk on 7/24/2022 09:46:00 AM

Expectations are the FOMC will announce a 75bp rate increase in the federal funds rate at the meeting this week.

From Merrill Lynch:

“We look for the Fed to lift the target range for the federal funds rate by 75bp to 2.25-2.5% while keeping its balance sheet normalization policies in place. … We look for Chair Powell to repeat similar messages from the June FOMC meeting; namely that inflation is too high, the Fed is committed to restoring price stability, and some pain may be needed to bring inflation lower. Looking ahead, we expect another 50bp increase in September and two additional 25bp rate hikes by year end, which would bring the target range for the federal funds rate to 3.25-3.50%.”

From Goldman Sachs:

“We expect a 75bp rate hike at the July FOMC meeting next week. … The key question for next week is what guidance Chair Powell will give about the size of a likely rate hike in September. We expect that Fed officials will want to keep their options open and will avoid any strong guidance. … We continue to expect a 50bp hike in September and 25bp hikes in November and December to a terminal rate of 3.25-3.5%.”
Analysts will be looking for comments on the size of future rate hikes.
Projections will not be released at this meeting. For review, here are the June projections.
In June, most participants expected thirteen 25bp rate hikes in 2022. The FOMC raised rates 25 bp in March, 50 bp in May, and 75 bp in June.

Wall Street forecasts have been revised down further since June due to the ongoing negative impacts from the pandemic. the war in Ukraine and financial tightening. For example, from BofA:

“We now forecast 1.1% GDP growth for 2022 and expect growth to slow to -0.2% in 2023”
GDP projections of Federal Reserve Governors and Reserve Bank presidents, Change in Real GDP1Projection Date202220232024June 20221.5 to 1.91.3 to 2.01.5 to 2.0Mar 20222.5 to 3.02.1 to 2.51.8 to 2.0

1 Projections of change in real GDP and inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated.

The unemployment rate was at 3.6% in June. So far, the economic slowdown has not pushed up the unemployment rate.

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents, Unemployment Rate2Projection Date202220232024June 20223.6 to 3.83.8 to 4.13.9 to 4.1Mar 20223.4 to 3.63.3 to 3.63.2 to 3.7

2 Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

As of May 2022, PCE inflation was up 6.3% from May 2021. This was below the cycle high of 6.6% YoY in March. Analysts are expecting inflation to decline slowly.

Inflation projections of Federal Reserve Governors and Reserve Bank presidents, PCE Inflation1Projection Date202220232024June 20225.0 to 5.32.4 to 3.02.0 to 2.5Mar 20224.1 to 4.72.3 to 3.02.1 to 2.4

PCE core inflation was up 4.7% in May year-over-year. This was below the cycle high of 5.3% YoY in February.

Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents, Core Inflation1Projection Date202220232024June 20224.2 to 4.52.5 to 3.22.1 to 2.5Mar 20223.9 to 4.42.4 to 3.02.1 to 2.4

Posted by
Calculated Risk

on 7/24/2022 09:46:00 AM

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