Markets flinch at Fed's aggressive action - Butler Financial, LTD
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Markets flinch at Fed’s aggressive action

No interest rate cuts are in sight until 2024, according to the Fed’s new dot plot.

  • The Fed aims to keep interest rates higher for longer.
  • FOMC raised the federal funds rate by 75 basis points.
  • Restrictive monetary policy may push the economy into a recession.

The U.S. Federal Reserve (Fed) strengthened its hawkish tone at the Federal Open Market Committee meeting with a new dot plot, indicating interest rates will be higher for longer with no cuts until 2024. On September 21, Fed Chairman Jerome Powell announced the third consecutive rate hike of 75 basis points (bps) and 300 bps of cumulative increase year to date.

“This increase plus the current expected path puts the federal funds rate at about 4.5% by the end of this year, which means that the Fed is expected to increase rates by at least 75 bps in November and 50 bps in December,” said Raymond James Chief Economist Eugenio J. Alemán, Ph.D.

Powell has vowed to take aggressive action to combat inflation. This is the Fed’s fifth interest rate hike in this tightening cycle dating back to its first hike that began March 16. Before Powell’s speech at Jackson Hole in August, markets were hoping for possible rate cuts in 2023, but that is off the table now.

“It is clear that the Fed is serious about bringing down inflation even if they have to keep increasing interest rates into restrictive territory and risk pushing the economy into a recession,” said Alemán.

Although Fed officials believe inflation is going to come down, they are not as positive as they were several months ago. They believe that it will take longer for inflation to come down to their 2% target and are expected to bring interest rates higher to achieve that goal. The Fed also sees GDP growth slowing to 0.2% year over year for 2022, a sharp drop from the 1.7% year-over-year forecast in June.

“Our base case for U.S. GDP includes a recession starting in the first quarter of 2023 and lasting until the third quarter of 2023,” said Alemán.      

This material is being provided for informational purposes only. Expressions of opinion reflect the judgment of the Chief Investment Office, are provided as of September 21, 2022 and are subject to change. Any information should not be deemed a recommendation.  Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the economy, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. There is no guarantee that the statements, opinions, or forecasts provided herein will prove to be correct. Past performance does not guarantee future results.

© 2022 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. © 2022 Raymond James Financial Services, Inc., member FINRA/SIPC. Investment products are: not deposits, not FDIC/NCUA insured, not insured by any government agency, not bank guaranteed, subject to risk and may lose value.

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