- The Federal Open Market Committee (FOMC) meeting and statement: On 21 September, the Fed hiked the Fed funds rate by 75bp, to 3-3.25%, the third consecutive 75bp rate hike, and the fifth rate increase in 2022. This means the central bank has raised rates by 3 percentage points this year, clearly prioritising its aim to tame inflation even if it means damaging economic growth.
- Press conference: Chair Powell was more hawkish than expected, making it clear that he wants to move rates into restrictive territory in order to control rising prices. This means unemployment forecasts were increased for this year, 2023 and 2024 which are in any case above the Fed’s long run projections. On the other hand, economic growth predictions were downgraded.
- Market reaction and investment implications: The markets responded in a risk-off manner, with equities falling owing to concerns over growth and the dollar rising in a flight to quality move. Furthermore, the yield curve inverted as yields on the policy sensitive 2Y bonds rose, and 10Y yields fell marginally. We maintain a cautious stance on risk assets, favouring the quality side of the markets in both equities and credit, with a particular focus on liquidity and balance sheets. On duration, we believe government bonds could offer protection at a time when risks of a ‘hard landing’ have increased. We stay close to neutral with an agile, tactical stance.
On 21 September, the Fed hiked its fund rate by 75bp to 3.00-3.25%. The Summary of Economic Projections (SEP), as well as the dot plot and tone of the post-meeting press conference were more hawkish than expected. We outline the key takeaways from the meeting below:
- A third consecutive 75bp rate hike, but the Fed clarified that the pace of future rate hikes would be data dependent.
- Much higher median Fed funds projections via the updated ‘dots’: 4.375% vs 3.375% in June for year-end 2022, 4.625% vs 3.875% for year-end 2023.
- SEP: Higher inflation forecasts but lower growth expected in 22/23.
- Press conference: Powell maintained his “do what it takes” approach on inflation but emphasised uncertainty over how long higher rates would last and how far the Fed would go in hiking rates.