PrefBlog

The Fed hiked 75bp to 3.00%:

Recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low. 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. The Committee is highly attentive to inflation risks.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 3 to 3-1/4 percent and anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve’s Balance Sheet that were issued in May. The Committee is strongly committed to returning inflation to its 2 percent objective.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Lael Brainard; James Bullard; Susan M. Collins; Lisa D. Cook; Esther L. George; Philip N. Jefferson; Loretta J. Mester; and Christopher J. Waller.

Their projection for the Fed Funds Rate in 2023 increased to 4.6%, up sharply from the June projection of 3.8%. However the post-2025 ‘longer-run’ projection remains at 2.5%. It should be noted that the projections for 2024 from the FOMC participants are all over the map, from a low of 2.625% to a high of 4.625%.

Powell was asked about housing prices:

Federal Reserve Chair Jerome Powell on Wednesday said the U.S. housing market will probably go through a “correction” after a period of “red hot” price increases that have put home ownership out of reach for many Americans.

“There was a big imbalance … housing prices were going up at an unsustainably fast level,” Powell said at a news conference following the Fed’s decision to raise its policy rate by another 75 basis points. “For the longer term what we need is supply and demand to get better aligned so housing prices go up at a reasonable level, at a reasonable pace and people can afford houses again. We probably in the housing market have to go through a correction to get back to that place.”

In the end, equities were down and bonds were flat:

After seesawing in the afternoon, the S&P 500 closed 1.7 percent lower for the day, as investors reacted to policymakers forecasts for higher interest rates in the future.
…
However, bond traders took a more muted view of the Fed’s guidance. The two-year Treasury yield, sensitive to changes in Fed policy, only inched higher, to 4.02 percent. Futures prices that show where investors expect rates to be at the end of the year barely budged, despite a marked increase to the Fed’s own rate forecasts.

PerpetualDiscounts now yield 6.32%, equivalent to 8.22% interest at the standard equivalency factor of 1.3x. Long corporates now yield 5.06%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has remained at the 315bp reported September 14.

This entry was posted on Wednesday, September 21st, 2022 at 7:22 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.