United States Monetary Policy September 2022

At its September 20-21 meeting, 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 75 basis point hike in a row. The Fed also stated that it would further reduce the size of its balance sheet.

The rate hike decision was part of ongoing efforts to bring down inflation, which remains stubbornly high at over four times the central bank’s 2.0% target – despite a slump in July and August. A combination of external price pressures and the strong domestic labor market is fueling inflation.

Looking ahead, the Fed reiterated that “ongoing increases in the target range will be appropriate.” The Fed board members’ median forecast is in the middle of a target range of 4.4% at the end of 2022 and 4.6% at the end of 2023, well above the bank’s June forecast. For now, our panellists are a little more cautious and our consensus is for another tightening of around 70 basis points by the end of 2022, although forecasts range from 25 to 125 basis points.

Analysts at the EIU commented on the outlook:

“Our current forecast assumes that the Fed will start to ease the pace of tightening in the next two meetings […] before pausing at a peak rate of 3.75-4%. […] We expect the monthly inflation and jobs data to weaken ahead of the next meeting on November 1-2, prompting the Fed to slow the pace of tightening.

Nomura analysts were more restrictive:

“Following today’s meeting, we continue to believe that a final interest rate of 4.50% to 4.75% will be necessary to tighten financial conditions, slow growth and bring inflation back to target. As the committee hiked 25 basis points less than we had assumed at the September meeting, we have raised our rate hike expectation for November to 75 basis points.

The next FOMC meeting is scheduled for April 1-2. scheduled for Nov.