No surprise, the U.S. Federal Reserve raises rates by another 0.75%

Key messages

• The range for the federal funds rate was increased by 0.75% to 2.25%-to-2.50%.
• The Fed will continue to reduce the size of its balance sheet.
• Additional rate hikes are still expected to tame inflation.

Doubling down on its policy move in June, the U.S. Federal Reserve (Fed) announced on Wednesday afternoon that it would raise the target range for the federal funds rate by an additional 0.75%. The target range is now 2.25%-to-2.50%. The move was unanimously agreed upon by all twelve members of the Federal Open Market Committee (FOMC) and widely anticipated by markets.

The FOMC remains committed to its maximum employment and 2% long-term inflation goals. As such, it reiterated that it “anticipates that ongoing increases to the target range will be appropriate” and that it will “continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities.”

Ongoing concerns: The war, the pandemic and inflation

Rationale for elevated inflation remains unchanged in the eyes of the Fed, “Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures. Russia's war against Ukraine is causing tremendous human and economic hardship. The war and related events are creating additional upward pressure on inflation and are weighing on global economic activity.”

Back in June, the Fed revised its expectations for inflation (higher in the short term) and domestic growth (lower in the short term). Job gains remain robust and unemployment is still low, however, the Fed did note that “recent indicators of spending and production have softened.”

Taking more risk off the table

Equity markets traded higher on Wednesday in anticipation of the 0.75% rate hike. Unsurprisingly, reaction to the announcement was benign as markets have already been pricing-in additional interest rate increases. From its June announcement, the Fed expects the median federal funds rate to be 3.4% by the end of 2022. U.S bond yields remain elevated across maturities and the U.S. dollar depreciated versus other major currencies following the announcement.

We have further increased our overweight to cash and underweight to equities in our portfolios. Our modelling has continued to downgrade the prospects for the global economy while flagging increased risk of recession. Inflation readings have continued to rise, forcing central banks to increase the pace of monetary policy tightening. This is further complicated by the ongoing war in Ukraine and the pandemic-related restrictions in China.

Regarding fixed income, we are overweight on the long end of the yield curve as we expect central banks will not be able to raise interest rates to levels currently priced in by the market.

If you have any questions about this announcement, our positioning or how it will impact you, please contact your MD Advisor*.

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

The Fed’s next interest rate announcement is scheduled for September 21, 2022 and will be accompanied by the latest Summary of Economic Projections.

* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec).

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.