The Federal Reserve raise the key interest rate by 75 basis points on Wednesday, the biggest move since 1994. According to analysts at Wells Fargo, the action demonstrates FOMC’s growing concern over inflation as well as its increased commitment to restore price stability.
“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 (or greater weakening in the labor market is likely to ensue).”
“Today's hike boosts the Fed's credibility and demonstrates that the door is open for similar adjustments at future meetings. This suggests to us a much more sensitive reaction function from the FOMC, and similar upside inflation surprises in the future very well may be met with equally aggressive upside surprises for the federal funds rate.”
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