Fed hikes rates: How high will rates go in 2022?

The U.S. Federal Reserve agreed on 27 July to raise its benchmark policy rate by 75 basis points, bringing the target for the federal funds rate to 2.25% to 2.5%, as was widely expected by the market. Inflation rose to a higher-than-expected 9.1% in June, the highest since 1981. The market had been anticipating a 100 basis points increase until recent data painted an increasingly bearish view of the U.S. economy, with the Fed noting that “recent indicators of spending and production have softened.”

Going forward, our panel of analysts expects another 100 basis points of tightening this year. This would bring the federal funds target range to 3.50–3.75%. This is above the Fed’s estimate of the neutral rate of interest—the interest rate which keeps output at its maximum level while keeping inflation constant—and is therefore likely to be contractionary. This projection is in line with Fed Chair Powell’s comment made after yesterday’s decision that he thought some period of below-potential growth was needed for supply to catch up with demand.

Three Fed meetings remain this year. Our panel expects 50 basis points of additional tightening at the next meeting on 20–21 September, with the final 50 basis points of tightening projected to take place during the last two meetings in November and December.

That said, Chair Powell avoided giving explicit forward guidance on future rate hikes, stating that policy would be set on a meeting-by-meeting basis. As a result, forecasts will be adjusted in line with new information. Data released today shows the U.S. economy contracted for a second quarter running in Q2, which may lead the Fed to tone down its aggressive tightening ahead. Meanwhile, July inflation data is set to be released on 10 August.

Insights from Our Analyst Network

Analysts at ING commented on the monetary policy outlook:

“We have the best part of two months until the 21 September FOMC meeting, a period that includes two job reports, two inflation reports and the Fed’s Jackson Hole symposium (25-27 August). A lot could happen in that time so it is unsurprising that the Fed is being somewhat vague in its forward guidance. […] The immediate priority is getting a grip on inflation, but we think the Fed will switch to 50bp hikes at the September and November FOMC meetings with a final 25bp hike in December.”

Randall Bartlett, Senior Director of Canadian Economics at Desjardins, said:

“While inflation looks as though it may have peaked, it remains stubbornly high. As such, we expect another 75bps move in September, making it a hattrick of heavy-handed hikes. After that, the pace of rate hikes is expected to slow, particularly if inflation steadily slows. We currently anticipate that the range of the terminal value for the federal funds rate will reach 3.25% to 3.5% before the end of this year.”

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