United States Monetary Policy September 2022

At its meeting on 20–21 September, the Federal Open Market Committee (FOMC) decided to raise the target range for the federal funds rate by 75 basis points to 3.00–3.25%—the third successive 75 basis-point hike. The Fed also stated that it would continue reducing the size of its balance sheet.

The decision to hike was part of ongoing efforts to drive down inflation, which remains stubbornly high at over four times the Central Bank’s 2.0% target—despite dipping in July and August. A combination of external price pressures and the strong domestic labor market are fueling inflation.

Looking forward, the Fed reiterated that “ongoing increases in the target range will be appropriate”. The median projection among Fed board members is for a target range midpoint of 4.4% at end-2022 and 4.6% at end-2023, substantially higher than the Bank’s June projections. For now, our panelists are slightly more dovish, and our Consensus is for around 70 basis points of additional tightening by end-2022, although forecasts range from 25 to 125 basis points.

On the outlook, analysts at the EIU said:

“Our current forecast assumes that the Fed will start to moderate the pace of tightening at the next two meetings […] before pausing at a peak rate of 3.75-4%. […] We expect monthly inflation and labour market data to soften before the next meeting on November 1st-2nd, prompting the Fed to slow the pace of tightening.”

Analysts at Nomura were more hawkish:

“Following today’s meeting, we continue to believe a 4.50-4.75% terminal rate will be necessary to tighten financial conditions, slow growth and bring inflation back down to target. As the Committee hiked by 25bp less than we had assumed at the September meeting, we raised our November rate hike expectation to 75bp.”

The next FOMC meeting is scheduled for 1–2 November.