The FOMC Meeting - Sep 2022
There's no more Fedspeak
We got a 75 basis point (0.75%) rate hike yesterday but listening into the meeting, it would seem that we got a lot more than that. The Fed Funds rate at 3-3.25% is now at the highest level since early 2008 and has surpassed the last rate hike cycle during December 2015 to December 2018. If this isn’t aggressive, I don’t know what is.
But first, let’s start with how the market took the news:
Not well and rightfully so. I made a joke this morning about how soothing Powell’s voice was even when he delivered bad news. And I think the news is quite bad!
He had a straight face and calm demeanor but, his message was clear:
Ongoing increases will be appropriate
Restoring price stability will like require maintaining a restrictive stance for some time
Historical record cautions strongly against prematurely loosening policy
If this wasn’t evident from everything I’ve written before, let me say it again now - there is no Fed pivot coming anytime soon and this time you can hear it from the Fed:
In terms of reducing rates, we need to be sure that inflation is moving to the 2% target before we can consider that.
The Dot Plot
No Fed meeting is complete without a discussion of the dot plot. The Fed will continue to front load rates because inflation is running too high.
He spoke about people looking at 100bps but they didn't vote on that in this meeting. Just the mention of the term is not great and they are looking at staying restrictive and getting to their median projections as quickly as they can, which means that they are ready to be as aggressive as needed.
What did the dot plot show?
4.4% as the Median projection for 2022 - that a full 1% above the June projections
4.6% in 2023
3.9% for 2024
2.9% for 2025 which is still above neutral
Summary of Economic Projections:
This time’s meeting had the Summary of Economic Projections (SEP) and I believe that’s what really scared the market. The projections have changed quite a lot from the June meeting, when the last SEP was done.
The projected GDP growth for 2022 is now only 0.2% which is so negligible it might as well be flat. The projected GDP growth for 2023 is only 1.2%. Last time around, this was just below 2%. The Fed Chair kept insisting that there’s a very high likelihood of below trend growth... in other words a recession.
According Chair Powell, there's certainly a possibility that the growth can be stronger than that and that's a good thing, it means that the economy can withstand the hiking. But you know what? When asked what they wanted to see, he said:
they want to see growth moving down back below trend
better balance in the labor market
inflation moving towards their long-run 2% target
So they actually do want to see growth reduce, something that we’ve been saying for a while and this doesn’t bode well for the stock market and companies in general. We’re going to see spending decline, company revenues decline and this will lead to an earnings recession. This will in turn cause companies to lay people off leading to a rise in unemployment.
Speaking of unemployment, these projections were unsettling.
Median projections came in at 4.4% in 2023 which was 0.50% higher than the June projections, with 3-year median running above their long run median level.
The comments that came after were more jarring. The Fed Chair repeatedly emphasized the need for a softer labor market. And even when asked that this level of employment would mean over a million jobs would be lost, he empathized but said there was no other way to bring inflation down without causing some pain.
[They have] given up the idea of a modest increase in unemployment. Postponing will lead to more pain.
My view: They may even be okay with a 6% unemployment rate, if it means inflation is coming down.
I can’t count the number of times the Fed Chair talked about the “2% inflation target” but, he said they’d be happy with 2.10% in the long run as well. (Big difference!)
The bottom line
There was no Fedspeak this time. The message was vey clear.
Looking at all the charts above, the timeline for all this is 2024, which is what the Fed Chair alluded to. So we have 2 years of pain ahead of us, if what the Fed is saying is true. At this point there is no reason not to believe them.
The Fed needs growth to decline, they need the labour market to soften, i.e., unemployment to go up and they will keep at it till the job is done.
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