75 points! Fed hikes rates in a big way

I was wondering if the Fed would go big in an attempt to slow down our high inflation, and they sure did this afternoon. Ending weeks of speculation, the rate-setting Federal Open Market Committee took the level of its benchmark funds rate to a range of 1.5%-1.75%, the highest since just before the Covid pandemic began in March 2020......

“Clearly, today’s 75 basis point increase is an unusually large one, and I do not expect moves of this size to be common,” [Fed Chairman Jerome] Powell said. He added, though, that he expects the July meeting to see an increase of 50 or 75 basis points. He said decisions will be made “meeting by meeting” and the Fed will “continue to communicate our intentions as clearly as we can.”

“We want to see progress. Inflation can’t go down until it flattens out,” Powell said. “If we don’t see progress ... that could cause us to react. Soon enough, we will be seeing some progress.” We haven't been seeing that flattening in the CPI so far, and gas prices have continued to rise in June. If that trend continues, Chairman Powell said the Fed will keep on hiking.

The Fed’s benchmark rate will end the year at 3.4%, according to the midpoint of the target range of individual members’ expectations. That compares with an upward revision of 1.5 percentage points from the March estimate. The committee then sees the rate rising to 3.8% in 2023, a full percentage point higher than what was expected in March.

As you can see above, a 3.4% Fed Funds rate would be higher than at any time since the Great Recession. Guess it's a good thing I locked in my 2.72% car loan last month, eh?

I will add that we did get an indication today that the stronger dollar is blunting inflation in one way, as the price of non-fuel imports dropped by 0.3% in May, and those prices of imports have risen by a total of just over 5% since June. Of course, you gotta have the imports coming in for that to make a bigger impact, but right now I'll take any sign of moderation that I can.

While the Fed reduced its estimates of real GDP growth for 2022 from 2.8% to 1.7%, and bumped up its expected unemployment rate for the year from 3.5% to 3.7%, its statement also said that economic activity was improving after a slow first 3 months.

Overall economic activity appears to have picked up after edging down in the first quarter. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures.

But because our inflation is more due to a combination of weird events, I hope the Fed continues to keep an eye on jobs and growth. It's not 1980 - this hasn’t been a long-lasting, ongoing cycle of price hikes. Our inflation has mostly been due more to temporary incidents like COVID disruptions, stimulus, speculation on the financial markets, and European conflicts that mess up supply-and-demand on the World’s (not America’s) oil market.

The markets seemed to respond positively to the 75-point move, but more moves seem certain to come throughout the Summer and Fall, and we'll see what hits the wall first - jobs, prices, assets....or any combination of the 3.