Economic Market Pulse | June 18, 2022

The Fed’s larger 75 bps rate hike came as little surprise to the markets following the worse-than-expected May CPI data. The decision to raise interest rates by 75bp to 1.50-1.75%, rather than the 50bp widely telegraphed by officials before the May inflation data, was almost unanimous.

Alongside the bigger hike, the language in the policy statement was beefed up too, with a firmer pledge that the FOMC “is strongly committed to returning inflation to its 2% objective” while the working arguing that the labor market would remain strong, even as the policy was tightened, was dropped.

Officials now see the fed funds rate reaching 3.25-3.50% by the end of this year and peak at between 3.50-4.00% next year, which would imply another 75bp hike in July, followed by a 50bp move in September and then 25bp hikes in November and December and two more 25bp hikes in early 2024.

Capital Economics accompanying economic projections show inflation remaining higher over the next few years while economic growth is now seen at a below-trend 1.7% this year and next, with the unemployment rate rising back above 4% by 2024.