US monetary policy September 2022

At its meeting on September 20-21, 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 consecutive increase of 75 basis points. The Fed also stated that it will continue to shrink the size of its balance sheet.

The decision to increase was part of ongoing efforts to bring down inflation, which remains more than four times the central bank’s 2.0% target – despite a dip in July and August. A combination of external price pressures and a strong domestic labor market is driving up inflation.

Looking ahead, the Fed reiterated that “continued increases in the target range will be appropriate.” The median forecast among Fed board members is for a mid-range target point of 4.4% at the end of 2022 and 4.6% at the end of 2023, well above the bank’s forecast for June. At the moment, committee members are somewhat more pessimistic, and we’d agree on about 70 basis points of additional tightening by the end of 2022, though forecasts range from 25 to 125 basis points.

On the outlook, analysts at EIU said:

“Our current forecast is that the Fed will begin to ease the pace of tightening in the next two meetings.” […] Before stopping at a peak rate of 3.75-4%. […] We expect monthly inflation and labor market data to decline before the next meeting on November 1st and 2nd, prompting the Fed to slow the pace of tightening.”

The analysts at Nomura were more hawkish:

“After today’s meeting, we continue to believe that a final interest rate of 4.50-4.75% will be necessary to tighten financial conditions, slow growth, and bring inflation back to target. With the committee up 25 basis points less than we expected at the September meeting, we raised our expectations for a hike interest rate in November to 75 basis points.”

The next Federal Open Market Committee meeting is scheduled for November 1-2.

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