Indicates Further Rate Hikes Coming

• As expected, the FOMC raised the fed funds rate by 75 basis points.
• The statement reiterated the FOMC’s commitment to achieving its 2% inflation objective.
• The statement noted slowing growth, but also cited the strong labor market. There was no mention of a potential recession.
• PNC expects the FOMC to continue raising the fed funds rate through the rest of this year, including an increase of 50 basis points at the committee’s next meeting, in mid-September.
• Market reaction was muted, given that today’s move was widely expected.

As widely expected, the Federal Open Market Committee raised the federal funds rate by 75 basis points, to a range of 2.25% to 2.50%. The fed funds rate started the year at close to 0%; the FOMC has aggressively raised the rate this year in an effort to slow inflation, which is running well above the committee’s 2% objective. The FOMC also raised the fed funds rate by 75 basis points at its last meeting, on June 15.

The statement indicated in two different places that the FOMC is concerned about inflation, saying that “the Committee is highly attentive to inflation risks” and “the Committee is strongly committed to returning inflation to its 2% objective.” Going forward, the statement said that the FOMC is “prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals” of low inflation and maximum employment.

The FOMC said in its statement that it “anticipates that ongoing increases in the target range will be appropriate.” It also said that the Fed will continue to reduce its holdings of long-term Treasurys and mortgage-backed securities, as previously announced. In the wake of the pandemic, the FOMC created money electronically, using the proceeds to purchase long-term Treasurys and MBS, putting downward pressure on long-term interest rates, including mortgage rates. Now that the economy has largely recovered and inflation is much higher than the Fed would like, the central bank is not replacing some of these securities as they mature, reducing the size of the Fed’s balance sheet; this has pushed up long-term interest rates.

In the section on current economic conditions, the FOMC said that “recent indicators of spending and production have softened.” However, the statement also noted that recent “job gains have been robust.” In talking about current inflation, the FOMC called it “elevated,” citing “supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.”

In a paragraph on the Russian invasion of Ukraine, the statement said that it is “creating additional upward pressure on inflation and [is] weighing on global economic activity.”

Compared to the previous statement on June 15, the FOMC dropped a sentence about COVD-related disruptions in China exacerbating supply chain issues.

The statement was approved unanimously.

Today’s FOMC statement was as expected. The committee raised the fed funds rate by 75 basis points, indicated that further near-term rate hikes are likely, and maintained its policy of reducing the Fed’s balance sheet. The statement noted a recent slowing in growth, but also highlighted the strong labor market and did not mention potential recession. The FOMC indicated that the pace of rate hikes going forward will depend on both the path of inflation and the outlook for the labor market.

PNC expects the FOMC to raise the fed funds rate by 50 basis points at its next meeting, on September 21. However, risks are to the upside, toward an increase of more than 50 basis points, depending on inflation data over the next couple of months. PNC expects the fed funds rate to be in a range between 3.25% and 3.50% at the end of this year, and then peak in a range between 3.50% and 3.75% in the first half of 2023.

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