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Another rate hike for the U.S. Federal Reserve, more to come

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Key messages

  • The range for the federal funds rate was increased to 3.00%-to-3.25%.
  • Expected economic growth was revised down, inflation up.
  • Rates are expected to go higher in ongoing fight against inflation.

In a release similar to its June and July statements, the U.S. Federal Reserve (Fed) announced that it would raise the target range for the federal funds rate by 0.75% for a third consecutive time, bringing the target range to 3.00%-to-3.25%. The decision was widely expected by markets and was agreed upon by all twelve members of the Federal Open Market Committee.

In its ongoing efforts to foster maximum employment and tame inflation to 2% over the long term, the Fed will also “continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities.” It also repeated that it “anticipates that ongoing increases in the target range will be appropriate.” In his speech following the Fed’s release, Chairman Powell said, “we will keep at it until we are confident the job is done.”

Short-term U.S. economic growth revised down, but stays positive

Published alongside this month’s interest rate announcement was the latest Summary of Economic Projections. Notably, U.S. economic growth was revised down to 0.2% from 1.7% for 2022, 1.2% from 1.7% for 2023 and 1.7% from 1.9% for 2024 relative to its June projections. Longer-term growth remains unchanged.

Inflation remains elevated and is expected to run higher in the short-term

Taken from the Fed’s statement, “inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.” Additionally, regarding the invasion of Ukraine, “the war and related events are creating additional upward pressure on inflation and are weighing on global economic activity.”

Short-term inflation (Personal Consumption Expenditures Price Index) was once again revised higher from the previous projections (June), although by a lesser extent. The Fed’s expectations for inflation are up to 5.4% from 5.2% for 2022, 2.8% from 2.6% for 2023 and 2.3% from 2.2% for 2024. The Fed still expects to achieve it’s 2% inflation target by 2025.

Interest rates to move higher, faster

The Fed expects the median federal funds rate to be 4.4% by the end of 2022, 4.6% in 2023, 3.9% in 2024, 2.9% in 2025 before settling at 2.5% long term. This is another material increase in short-term expectations. June’s projections were 3.4% in 2022, 3.8% in 2023 and 3.4% in 2024, respectively.

Equity markets were flat leading up to the announcement, and despite the 0.75% rate increase being widely anticipated, the S&P 500 Index ended the day lower following the Wednesday 2:00 p.m. release. U.S. bond yields climbed further and remained elevated across maturities and the U.S. dollar appreciated versus most major currencies.

Staying cautious

At this time, we remain underweight equities and overweight cash in our portfolios. Our modelling has continued to downgrade the prospects for the global economy while flagging increasing recession concerns. While inflation readings have improved, they remain high, forcing central banks like the Fed to increase the pace of monetary policy tightening. This is further complicated by the ongoing situation in the Ukraine and pandemic-related restrictions, particularly in China.

If you are wondering how rising rates will impact your finances beyond your investments, here’s what interest rate increases could mean for physicians.

For more information about this announcement or your portfolio, please contact your MD Advisor*.

The Fed’s next interest rate announcement is scheduled for November 2, 2022.

* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.

The above information should not be construed as offering specific financial, investment, foreign or domestic taxation, legal, accounting or similar professional advice nor is it intended to replace the advice of independent tax, accounting or legal professionals.

About the Author

Richard Schmidt, CFA, is an Associate Portfolio Manager with the Multi-Asset Management Team of 1832 Asset Management L.P. His primary focus is MD’s North American equity funds and pools.

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