• The FOMC raised the federal funds rate by 75 basis points.
• The FOMC maintained its plans for reducing the size of the balance sheet.
• The median growth forecast was revised lower for 2022 and 2023, and the near-term inflation forecast was revised higher.
• The median FOMC participant now expects the fed funds rate to be 3.4% at the end of this year, up substantially from the previous forecast of 1.9% in March.

The Federal Open Market Committee raised the federal funds rate by 75 basis points, to a range of 1.50% to 1.75%. This was the first time the FOMC has raised the fed funds rate by this much since 1994. The FOMC had been telegraphing a 50 bps increase in the fed funds rate until a few days ago when news reports started to indicate that a 75 bps increase was likely. The FOMC is attempting to slow economic growth after inflation has moved well above the FOMC’s 2% objective. In his post-meeting press conference, Fed Chair Powell said that the FOMC would “like to see demand moderate..[with a] better balance between supply and demand” in the labor market.

Today’s statement said that “inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures.” It also said that the Russian invasion of Ukraine is putting “additional upward pressure on inflation.” The statement said that the FOMC “is highly attentive to inflation risks” and that “the Committee is strongly committed to returning inflation to its 2% objective.”

The FOMC also said that it will continue with its previously announced plans for reducing the size of its balance sheet. In June through August, the central bank will not replace up to $30 billion per month of maturing long-term Treasurys, and up to $17.5 billion of maturing mortgage-backed securities. Starting in September the Fed will up these monthly caps to $60 billion for Treasurys and $35 billion for MBS.

In terms of growth, the statement said that growth has picked up after a contraction in the first quarter, noting robust job growth and a low unemployment rate. The statement also noted that the Russian invasion of Ukraine is “weighing on global economic activity.” It also said that COVID lockdowns in Chain “exacerbate supply chain disruptions.”

Kansas City Fed President George voted against the statement, preferring a 50 basis point increase in the fed funds rate.

This meeting also included the release of the Summary of Economic Projections, or “dot plot.” GDP growth expectations have fallen compared to the previous release, in March. The median growth forecast for this year (Q4 to Q4) is now 1.7%, down from 2.8% in March, and for 2023 expected growth is now 1.7%, down from 2.2% in March. There has a correspondingly upward revision to the unemployment rate, to 3.7% at the end of this year, up from 3.5% in March. The median unemployment rate forecast for the fourth quarter of 2023 is now 3.9%, up from 3.5% in March.

The near-term outlook for inflation has moved higher, especially as measured by the overall personal consumption expenditures price index. The SEP has the overall PCE price index up 5.2% in the fourth quarter of this year from one year earlier, compared to 4.3% in March. But inflation is expected to slow to 2.6% by the end of 2023. Inflation as measured by the core PCE price index, excluding food and energy prices, is expected to be 4.3% at the end of this year (up from 4.1% in the March projections) and 2.7% in 2023 (up from 2.6%).

The outlook for the fed funds rate has moved much higher for 2022 compared to March. The median forecast is that the fed funds rate will be 3.4% at the end of this year; that is up from 1.9% in March. This means that the fed funds rate would increase by 1.75 percentage points for the rest of 2022. In his post-meeting press conference, Fed Chair Powell said this would mean that the fed funds rate would be at a “modestly restrictive level at the end of this year.” The fed funds rate was in a range of 0.00% to 0.25% at the beginning of 2022. The median projection for the fed funds rate at the end of 2023 is 3.8%, up from 2.8% in the March projections.

With inflation running well above the FOMC’s 2% objective, and CPI inflation in May coming in higher than expected, the FOMC moved aggressively. After numerous interviews and speeches pointing to a 50 basis point increase at this meeting, earlier this week media reports pointed to a 75 basis point increase, suggesting that the committee saw the need to act more decisively. In addition, the dot plot suggests further aggressive tightening, with a cumulative 175 basis points of tightening over the next six months (four meetings).

Powell said in his press conference that the economy is “very strong, and well-positioned to withstand tighter monetary policy.” However, with the FOMC moving very aggressively, the outlook for the economy over the next few years has weakened. The baseline outlook is still that the US economy manages to avoid recession over the next few years, but risks are elevated.

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