As expected, the Fed raised the target for the Federal Funds Rate by three-quarters of a percentage point today, which was the fourth straight jumbo increase this year. The biggest news from the Fed’s move was the indication that future increases may be smaller and slower to come.
The Fed has now moved the target rate by 375 basis points (BPs), the most in any year since 1981. By December, the rate moves this year are expected to surpass 1981 and will only be bested by 1980.
The natural level for the short-term rate is widely thought to be 2.5%. With the Fed Funds Rate now at 3.75% – 4.00%, the Fed has tightened the choke on the American economy to the point that the engine is likely to stall out.
The Fed is not done with increases, but their new language indicates a more data-driven approach to where rates go from here: “… the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”
This meeting did not produce any new dot plots, which define the likely rate path. The prior plots have suggested a slowing after today’s increase to a half point in December and another quarter point in 2023.
While we may be getting closer to the endpoint, the Fed has indicated they plan to keep rates high and restrictive until inflation has come down to their target of 2%.