Indicates That Smaller Increases Could Be Coming

• The FOMC raised the federal funds rate by 75 basis points, to a range of 3.75% to 4.00%. The rate was close to zero at the beginning of the year.
• The FOMC indicated that given lags in the way monetary policy works on the economy, the committee could slow the pace of rate increases in the near term.
• The statement noted weaker growth, but a strong labor market and continued high inflation.
• In his press conference Chair Powell reiterated the FOMC’s objective of 2%.
• PNC expects a 50 basis point increase in the fed funds rate at the FOMC’s next meeting, in mid-December.

As expected, the Federal Open Market Committee raised the federal funds rate by 75 basis points, to a range of 3.75% to 4.00%. At the beginning of the year, the fed funds rate was 0% to 0.25%; the central bank has been raising the rate aggressively to push back against inflation that is far above the Fed 2% objective.

Today’s statement said that the FOMC “anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time.” However, the statement also said that the FOMC “will take into account the cumulative tightening of monetary policy, [and] the Lags with which monetary policy affects economic activity and inflation.” This suggests that the FOMC could increase the fed funds rate by less than 75 basis points in upcoming meetings, but that those decisions will depend on incoming data on inflation and the labor market.

In discussing the economic outlook, the statement noted “modest growth in spending and production.” However, the statement also pointed out recent robust job gains and elevated inflation.

In his post-meeting press conference, Chair Powell reiterated the FOMC’s commitment to achieving 2% inflation and said that given still-high inflation, the peak fed funds rate in this tightening cycle could be higher than expected at the FOMC’s last meeting, in September. Powell also said that he does not think that as of now, the FOMC has “overtightened” with monetary policy. He noted that there has been a slowing in interest rate-sensitive industries, including housing. He also noted that importance of not loosening monetary policy too soon before inflation is contained. He said it would be “very premature to think about pausing” increases in the fed funds rate.

PNC expects the FOMC to raise the fed funds rate by 50 basis points when it meets next, in mid-December, and then by another 25 basis points at its first meeting in 2023. This would take the rate to a range of 4.50% to 4.75%, which would definitely be a weight on economic activity. At that point inflation should be softening and job growth should be slowing to a more sustainable pace, allowing the FOMC to stop raising the fed funds rate.