Fed Set To Ramp Up Rate Hikes To Fight Inflation – BIG NUMBER 10
As expected, the Federal Reserve Board on Wednesday raised the target range of the
federal funds rate—a key short-term interest rate—by 25 basis points from the current
0-25 bp to 25-50 bp. The move was widely anticipated as a reaction to the historically
high levels of inflation seen in recent months. For example, the consumer price index for
February 2022 rose 7.9 percent from a year earlier—the biggest increase since January
Looking beyond the immediate news of the day, we see that the Fed expects to
continue raising the fed funds rate during 2022 and into 2023 based on its forecast for
inflation and other factors.
As seen in the chart, the Fed’s so-called “dot plot”—in which each Fed official plots one
dot on a grid to show where they think rates are headed—suggests the Fed will raise
rates six more times this year and at least three times next year. That would mean at
least 10 rate hikes in total (counting Wednesday’s increase), bringing the fed funds rate
up to around 2.75 bp by the start of 2024.
As borrowing costs rise over time, consumers typically spend less—easing the pressure
on prices. Indeed, the market is now pricing the Fed to cut rates once during
2024—suggesting the market believes 10 hikes may be too much for the economy
to handle over the next 18 months.
Of course, the Fed’s outlook for the economy and interest rates can and does evolve as new data emerges.
Consider that back in December 2021, Fed officials were expecting just three rate hikes in 2022 and
about six more over the next two years. As always, we will closely monitor the Fed’s statements and
actions regarding inflation and interest rates—with a particular eye toward how those two factors are
impacting consumer confidence and consumer spending—and we will adjust the portfolios as
necessary to address economic and market conditions.
For clients who may be nervous about the short-term health of the economy, a strategy
designed to mitigate drawdown risk, while continuing to grow assets may be a fitting
David V. Thomas, Jr. offers products and services using the following business names: Vaughn Asset Advisory, LLC – insurance and financial services | Ameritas Investment Company, LLC (AIC), Member FINRA/SIPC – securities and investments | Ameritas Advisory Services (AAS) – investment advisory services. AIC and AAS are not affiliated with Vaughn Asset Advisory, LLC.
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All market data and economic data has been provided by Horizon Investments | Bloomberg | Bureau of Labor Statistics 3/10/2022 https://www.bls.gov/news.release/pdf/cpi.pdf
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