Fed Remains Hawkish, Focused on Restoring Price Stability with Large Rate Hike

The Federal Reserve remains strongly committed to bringing down inflation in the United States to its 2% goal. Today (Wednesday), Fed Chair Jerome Powell announced a policy interest rate hike of 75 basis points.

Powell highlighted during the FOMC Press Conference that restoring price stability is the Fed’s main target. Powell stated the Fed, “will keep at it until we are confident the job is done”.

The Fed’s hawkish decision moves its benchmark short-term rate to a range between 3% to 3.25%, the highest level in 14 years.

In August 2022, the annual change in the Consumer Price Index was 8.3%. Price pressure on everyday Americans remains elevated despite a reduction in gasoline prices across the country in recent months.

Powell continued during his statement that the Fed’s goal of restoring price stability will require a “restrictive policy stance for some time.” The Summary of Economic Projections (SEP) estimates that the suitable federal funds rate for the end of 2022 is 4.4%, 1 percentage point higher than it was projected in June.

Powell remained cautious regarding the SEP during his statement. “These projections do not represent a Committee decision or plan, and no one knows with any certainty where the economy will be a year or more from now.”

The implied probability for another rate hike of 75 bps for the Fed’s next meeting on November 2 has moved from 70% to 89% following Powell’s statement.

The U.S. economy is experiencing a downturn in growth from historically high growth rates in 2021. Growth in consumer spending has slowed, in large part due to elevated levels of the CPI leading to a reduction in disposable income. The housing market has weakened with rising mortgage rates while economic output abroad is restricted due to a reduction in exports.

With lingering fears of a U.S. recession, a sustained term of below-trend growth is required to soften inflated market conditions.

The guidance we give our clients remains the same. Invest in blue chip stocks and take advantage of the rising interest rate environment with some short-term fixed income securities such as bonds and Guaranteed Investment Certificates.

As always, if you have any questions about today’s Market Update, you can call us at 604-643-0101 or email cashgroup@cgf.com.