fed chair jerome powell rate hike

US stocks whipsawed yesterday amid the US Federal Reserve’s September meeting. As widely expected, the Fed raised rates by 75 basis points at the meeting. However, hawkish-than-expected Fed commentary triggered a sell-off in US stocks.

The September dot plot showed that FOMC (Federal Open Market Committee) members have raised their median 2022 interest rate forecast to 4.4%, which is 100 basis points higher than what it was in June. The median forecast is higher than what many analysts were expecting.

The Fed has raised rates by 3 percentage points this year and the current Fed fund rate of 3-3.25% is the highest since 2008. Looking at the dot plot, the Fed might announce yet another 75-basis points rate hike this year.

However, FOMC members see rate hikes slowing down in 2023 and the median estimates call for interest rates at 4.6% next year which would mean only one rate hike of 25 basis points. That said, these are only projections and the Fed would look at emerging data points before deciding on future decisions.

In his prepared remarks, Fed chair Jerome Powell said, “Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy.”

Powell Reiterates Hawkish Stance after September Fed Meeting

Powell’s comments are similar to what he said at the Jackson Hole Symposium last month. He dashed all hopes of a Fed pivot anytime soon which led to a rise in Treasury yields. The yields on both long- and short-term treasuries have spiked over the last month.

Powell also pointed to the slowdown in the US economy. He said “Recent indicators point to modest growth of spending and production. Growth in consumer spending has slowed from last year’s rapid pace, in part reflecting lower real disposable income and tighter financial conditions.” Powell also admitted that business investment has slowed down amid higher rates and slowing output.

He also said that the housing market is slowing down, partially due to higher mortgage rates. The average 30-year mortgage rate has topped 6% which is leading to a slowdown in mortgage demand. There are however ways to get the best mortgage rates.

Powell Expects Unemployment Rate to Rise amid Rate Hikes

The Fed expects the unemployment rate to rise to 4.4% by the end of next year and the forecast is 50 basis points higher than what it was at the June meeting. The median projections of FOMC members call for a PCE (personal consumption expenditure) inflation of 5.4% by the end of 2022. Members expect inflation to gradually fall to 2.8%, 2.3%, and 2.0% in 2023, 2024, and 2035 respectively.

Powell also talked about the possibility of rate cuts in the future. He said, “At some point, as the stance of monetary policy tightens further, it will become appropriate to slow the pace of increases, while we assess how our cumulative policy adjustments are affecting the economy and inflation.”

US stocks, especially growth stocks, have crashed this year amid the rise in Treasury yields. However, there are some investments that can outperform during inflation. Value and undervalued stocks have also outperformed the broader markets.

Cathie Wood and Gundlach believe the Fed is Making a Mistake

Cathie Wood of ARK Invest believes that the US economy is headed for deflation. Bond guru Jeffrey Gundlach has echoed her views and believes that bonds are an attractive investment option. Gundlach also said that the Fed is making the mistake of “overtightening.”

Meanwhile, Fed’s rate hikes are only adding to the slowdown in the US economy. On multiple occasions, Powell has said that the rate hikes might lead to recession. He also however emphasized that the Fed is not trying to force a recession.

Powell made similar comments after the September rate hike also. He said, “No one knows whether this process will lead to a recession or, if so, how significant that recession will be.” Most brokerages believe that US stocks might fall more in case the US heads for a recession.

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