June FOMC: Barreling toward restrictive policy
|Summary
The 75 bps rate hike by the FOMC today—the largest in 27 years—demonstrates the Committee’s growing concern over inflation as well as its increased commitment to restore price stability. The move takes the fed funds rate to a range of 1.50-1.75%, which is still below the Committee’s estimated range of neutral.
The statement and updated Summary of Economic Projections (SEP) showed the FOMC is prepared to continue to tighten policy at a historically aggressive pace. The median estimate for the fed funds rate at year-end rose to 3.375%, implying another 175 bps of tightening before the year is over.
Despite aiming to move policy into restrictive territory by year-end, the SEP continues to paint a rather optimistic picture of the economy ahead. GDP growth next year is expected to slow only slightly below trend, while inflation falls back to 2-3% and the unemployment rate rises modestly enough to where it remains within its "longer-run" neutral range. In our view, it will take a more material slowdown in economic growth to bring core inflation back to the FOMC's 2% target and more damage is likely to be inflicted to the labor market.
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