The Federal Open Market Committee (FOMC or Committee), the monetary policy making arm of the Federal Reserve, concluded its 2-day meeting this afternoon, and raised the overnight target lending rate between member banks by 0.25% (25 bps) to a range between 0.25% – 0.50%. The Committee based its decision on firmer labor market conditions and elevated consumer prices which have persisted longer than they had envisioned, especially energy prices. According to the Fed Funds futures market, this move was in-line with expectations.
Okay…that is the overly professional way of putting it. In simpler terms, the Fed met this afternoon and raised rates 0.25% to 0.50%, and surprised no one in the process.
Arguably more important than the move itself was the guidance the Committee gave regarding potential rate hikes in the future. According to the FOMC’s so-called “dot plot” chart, Committee members have individual predictions for the year-end overnight rate ranging from a low of 1.50% (upper range) to a high of 3.25%. The median (and mode) estimate is currently 2.00%, which would imply an additional 1.50% increase from today. If each rate hike is 25 bps (0.25%), this means the FOMC is likely to raise the overnight rate at every meeting between now and the end of December. Frankly, after last year’s surging economy and money supply, and 2022’s uncomfortably high inflation, it was about time for the Fed to do something. In other words, this is not bad news, and investors shouldn’t treat it as such.
Initially, however, the stock markets responded negatively to the announcement, which was perhaps a little more “hawkish” than investors had been expecting. Since then, Chairman Jay Powell’s comments have soothed frayed nerves, and the financial markets are currently performing in a favorable fashion. This was precisely how our Investment Committee thought today’s events would unfurl. After all, it is about time to get back to some sense of normalcy, and this is a step in the right direction.