Inflation is now the dominant threat to growth in the central bank’s view
The Federal Reserve (Fed) delivered on its messaging adopted so far this year that rates need to go higher. Deciding on a 25 bps increase in the discount rate, the Fed cautioned that inflation remains too hot for it not to act, despite financial conditions noticeably deteriorating this year. Its dot plot forecast showed a slightly wider ranging view of where the terminal rate will be and how soon it will get there – the seven hikes that the market had priced in this year is spot on with its assessment, so neither more hawkish nor dovish compared to market pricing. Covid references and its effect on the economy have now been removed and instead inflation is the dominant threat. The Fed’s inflation forecasts remain above target for the next three years while its growth forecasts have been cut. While the Fed may need to appear hawkish with stubbornly high inflation, it is obvious that had it acted sooner, it would not have needed to act so aggressively now and it is highly unlikely that, with a slowing economy and worsening financial conditions, its projected trajectory will be delivered on.
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