FOMC delivered a 25 basis points rate hike during a meeting today, a move that was in-line with market expectations. Such a decision was very well communicated by the Fed beforehand and major institutions adjusted its expectations. However, there was one dissenter - James Bullard - who voted for a 50 basis point rate hike. Fed Funds rate was increased from 0.00-0.25% to 0.25-0.50% but what comes next?
Dot-plot
A new dot-plot saw median expectations for 2022 end-year interest rate move up from 1.9%, meaning that Fed members expect a total of 6 rate hikes this year (25 bp rate hikes). The first one was already delivered and there are only 6 FOMC meetings left this year. Note that this is a median forecast therefore some Fed members expect rates to be hiked on every remaining meeting of 2022. Dot-plot also showed median expectations of 2.8% interest rate at end-2023 and 2.8% at end-2024, suggesting that rate hike cycle will be completed next year.
New dot-plot shows higher median expectations for interest rates. Note that more than half of Fed members expects rates to be hiked at each meeting this year. Source: Fed
Economic forecasts
A new set of macroeconomic forecasts was released along with the decision. A big takeaway is that the Fed sees much lower real GDP growth this year, compared to December's projection - 2.8% instead of 4.0%. Real GDP growth is expected to stay unchanged in 2023 and 2024 compared to December's forecast, at 2.2 and 2.0%, respectively. Inflation forecast looks interesting. While PCE inflation is expected to reach 4.3% in 2022, up from 2.7% in December's projections, it is still much lower than current figures. Forecasts for 2023 and 2024 were slightly higher as well. It is this pick-up in expected 2022 inflation that can explain a much weaker real GDP forecast.
Fed sees lower real GDP growth this year on the back of higher inflation. Source: Fed
Asset purchases
While investors hoped for some more clear remarks on the expected balance sheet reduction, Fed did not provide much more clarity on the issue. It was said that reduction of asset holdings will begin at a coming meeting but it was not specified at what pace. We can expect Fed Chair Powell to be pressed on the issue during his press conference at 6:30 pm GMT.
