As was widely expected, the Federal Reserve Open Market Committee raised the benchmark interest rate by 75 basis points, for the third consecutive meeting, to a range of 3.00%-3.25%, which is the highest level since 2008, to emphasize its determination to fight high inflation. Moreover, the interesting point is that all 12 members voted for that.
Equivocal words and leaving the doors open for any turn
The Dot Plot shows that the median forecast for the federal funds rate in 2023 and 2024 is 4.6%, up from the previous estimate of 3.8% and 3.9%, respectively. This means Fed still has 125 basis points of room to raise this year; 75 and 50 basis points rate hikes are expected for the next two meetings. On the other hand, most investors, analysts, and FOMC members believe in at least one more 75-basis points rate hike by the end of 2022.
On the economic projection front, Fed lowered its median GDP growth forecast for 2022, 2023, and 2024 to 0.2%, down from 1.7%, 1.2% down from 1.7%, and 1.7%, down from 1.9%. We could see the same weaker prospects in labor market data as well. The median unemployment rate is expected to increase to 3.8%, from 3.7%, 4.4% from 3.9%, and 4.4%, up from 4.1%, respectively, at the end of 2022, 2023, and 2024.
Participants also raised inflation expectations, and the median PCE inflation expectations at the end of 2022, 2023 and 2024 are expected to raise by 5.4% (up from 5.2%), 2.8% (up from 2.6%) and 2.3% (up from 2.2%). And Core PCE inflation expectations are 4.5% (up from 4.3%) in 2022, 3.1% (up from 2.7%) in 2023, and 2.3% (up from 2.3%) n 2024.
As usual, Fed chair Powell had a speech and press conference after the statement and economic projections. His answers to the reporters showed doubts and uncertainty about the next steps and the inflation situation. Thıs uncertınıty was the main reason for fast ıncrease of USVIX, probably Fed also admitted that a soft landing could not be achieved, and a recession will be inevitable. However, in his speech, he emphasized that no one knows if we will face a recession or not! With this uncertainty that the FED meeting gave to the market participants, the market risk increased, which can push stock markets lower at the end of the day. On the other hand, as investors could see some signs of possible relaxation in contractionary policies, bears would not be able to go so deep.