Breaking: Fed lifts Fed funds target rate by 25bps to 0.25-0.50% as expected, signals more hikes to come

The US Federal Reserve announced on Wednesday that the Federal Open Market Committee (FOMC) had voted to lift the Federal Funds Rate (FFR) target range to 0.25-0.50% from 0.00-0.25%, as expected. In the Fed's updated statement on monetary policy, it signaled that further rate hikes would be appropriate, as expected. 

Eight out of nine policy voters supported the move, with the one dissenting vote coming from St Louis Fed President James Bullard who favoured a larger 50bps move to 0.50-0.75%. The Fed said it expects inflation to return to its 2.0% target and for the labour market to remain strong with an appropriate firming of the stance of monetary policy. 

The Fed noted that inflation remains elevated, reflecting supply/demand imbalances related to the pandemic, higher energy costs and broader price pressures. The Fed noted, as Chairman Jerome Powell did in a speech last week, that the invasion of Ukraine by Russia is causing tremendous human and economic hardship and that the implications for the US economy are highly uncertain, but in the near-term, the invasion and related events are likely to create additional upwards pressure on inflation and to weigh on economic activity. 

Dot-plot

• The Fed's median view of the Fed funds rate at the end of 2022 was raised to 1.9% from 0.9% back in December. That implies the Fed now sees itself raising interest rates at every meeting for the rest of the year, meaning a total of seven 25bps hikes in 2022 (including this Wednesday's hike). 
• The Fed's median view of the Fed funds rate at the end of 2023 was raised to 2.8% from 1.6% back in December. That means the Fed views itself hiking interest rates by 25bps another four times in 2023 after seven 25bps moves in 2022. 11 of the Fed's 16 policymakers see the Fed Funds rate moving above the 2.4% neutral rate by the end of 2023, the new dot-plot showed. 
• The median view of the Fed funds rate at the end of 2024 was lifted to 2.8% from 2.1% in December. 
• The median view of the Fed funds rate in the longer-term was lowered to 2.4% from 2.5% in December. 

Economic Forecasts

• The Fed forecasts the unemployment rate to end 2022 at 3.5%, unchanged from its prior estimate, to end 2023 at 3.5% and to then edge up to 3.6% in 2024 before returning to its normal level of 4.0% in the long term. 
• The Fed sees PCE inflation of 4.3% in 2022 (revised up from the 2.6% estimate in December), 2.7% in 2023 and 2.3% in 2024, before returning to 2.0% in the long-run. 

Market Reaction

The Fed's new dot-plot was much more hawkish than expected, with the Fed signaling a 25bps rate hike at every meeting to the rest of the year followed by a further four in 2023. US 2-year yields (the most sensitive to Fed rate hike expectations) have rocketed towards 2.0% from under 1.90% to reflect the more hawkish rate path and are now up about 14bps on the day. 

Longer-term yields are also higher, with the 10-year jumping above 2.20% to hit new cycle highs but up a comparatively more modest 7bps on the day. The belly of the US curve has inverted for the first time since March 2020, with the 7-year yields now above the 10-year yield (at 2.26%ish and 2.23%ish respectively). 

The US dollar has been driven higher by Fed hawkishness and higher US yields, with the DXY testing 99.00 again, up from its pre-ed levels under 98.80. Further aiding USD upside is a safe-haven bid with US equities tumbling in wake of the Fed's latest announcement. The S&P 500 has dropped over 30 points from the 4310s to 4280 area in recent trade and is now barely trading with gains on the day. 

Focus now turns to Fed Chair Jerome Powell's post-meeting press conference which is scheduled to begin at 1830GMT.