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Although the economy is showing signs of slowing down, inflation has remained higher than expected.

• As anticipated, the Federal Reserve (Fed) increased the federal funds rate by 75 basis points (bps).
• Fed officials reiterated their commitment to bringing inflation down to their 2% target.
• The Fed indicated that although the economy is showing signs of slowing down, inflation has remained higher than expected.
• This increase in the federal funds rate takes the rate to 3.75%-4.00% with a total increase of 375 basis points since the beginning of 2022.

As anticipated, the Fed announced its fourth consecutive rate hike of 75 bps at the Federal Open Market Committee (FOMC) meeting on November 2, keeping with its aggressive efforts to curtail inflation.

This latest bump brings the cumulative increase year to date to 375 bps and the federal funds rate target to 3.75%-4.00%, the highest level since January 2008. It is the sixth interest rate hike since March 16, when the Fed’s tightening cycle commenced.

“The Fed is expected to continue raising interest rates at least one more time this year, and then one to two more increases next year. During its December FOMC meeting, we expect the Fed to increase the federal funds rate by another 50 basis points, and then two more 25 basis point increases in February and March of 2023,” said Raymond James Chief Economist Eugenio J. Alemán, Ph.D.

A key takeaway from the November meeting is this excerpt, which alludes to a potential slowing of the level of interest rate increases: “In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”

At the FOMC press conference, Fed Chairman Jerome Powell said: “There is significant uncertainty around that level of interest rates. Even so, we still have some ways to go, and incoming data since our last meeting suggest that the ultimate level of interest rates will be higher than previously expected.” Therefore, we now expect the Fed to raise the terminal rate higher than 4.5%, likely with smaller increases in early 2023.

The Fed reiterated that they are committed to bringing down inflation and will keep interest rates high for as long as it takes to achieve its target for the rate of inflation of 2%.

“Our base case for the U.S. economy is for a recession that will start during the first quarter of 2023 and end during the third quarter of 2023,” said Alemán.

All expressions of opinion reflect the judgment of Raymond James’ Chief Economist and are subject to change.

There is no assurance the trends mentioned will continue or that the forecasts discussed will be realized. Past performance may not be indicative of future results. Economic and market conditions are subject to change. Investing involves risk, and you may incur a profit or loss regardless of the strategy selected.