The Fed has already raised interest rates four times in 2022, but rampant inflation continues to plague consumers and the business community. At the September FOMC meeting, the board redoubled their efforts, raising rates by an additional 0.75%.
In addition to another rate hike, FOMC members submitted new forecasts for the future of the economy and monetary policy. The board’s GDP projections were revised significantly downward from the prior quarter, which could indicate additional economic pressures on the horizon.
FOMC Members Raised Rates for a Fifth Time in 2022
The FOMC began their September meeting just a week after the Bureau of Labor Statistics reported that consumer prices rose at an annual rate of 8.3% in August. This is far above the Fed’s target of 2% annual inflation and poses a significant concern for the economy if not controlled.
The other side of the Fed’s dual mandate – employment – has remained strong despite previous rate hikes. In August, the unemployment rate inched higher to 3.7%, but this figure remains low by historical standards.
With inflation continuing to run rampant and the labor market still showing signs of strength, FOMC members voted to raise the Fed funds rate by 0.75%, bringing the new target rate to 3.00% – 3.25%. In addition to raising the Fed funds rate, the FOMC will put additional downward pressure on interest rates by continuing to reduce the size of the Fed balance sheet through a process called quantitative tightening.
FOMC Members Project Slower Economic Growth and Higher Rates Ahead
At September’s meeting, FOMC members updated their projections for the economic and monetary policy outlook. These forecasts are released four times per year, and the last projections were in June.
GDP Growth Projections Revised Down
In June, FOMC members forecasted a 1.7% increase in real GDP by year end. This was revised down significantly in the latest projections. Now, FOMC members predict just a 0.2% increase in real GDP in 2022.
Economic growth in the coming years was also downgraded. In the most recent forecasts, real GDP growth estimates fell from 1.7% to 1.2% for 2023 and from 1.9% to 1.7% for 2024. For the long-run, FOMC members kept their prediction of an average 1.8% annual growth.
Unemployment Expected to Rise Substantially
FOMC members anticipate a slight increase in unemployment through the end of the year. The projected unemployment rate was increased from 3.7% to 3.8% in the board’s latest projections. However, a much larger increase in the unemployment rate is expected next year. FOMC member’s predictions for unemployment in 2023 increased from 3.9% to 4.4%. The board expects that figure to hold steady in 2024 before normalizing at 4.0%, long-term.
Prices Expected to Continue Rising in the Short-term
Adding to the subdued outlook of slower economic growth and higher unemployment, FOMC members also increased their projections for inflation. The anticipated increase in core PCE inflation was increased from 4.3% to 4.5% for 2022. Inflation is also expected to rise next year with the estimate increasing from 2.7% to 3.1%. In 2024 and the long-run, inflation estimates held steady at 2.3% and 2.0%, respectively.
Further Rate Hikes Expected
Along with higher inflation predictions, the FOMC anticipates the need for further rate hikes later this year. The Fed funds rate is expected to reach 4.4% by year end, a significant increase from the previous forecast of 3.4%. Interest rate increases are expected to continue next year with the anticipated Fed funds rate rising from the initial prediction of 3.8% to 4.6% for 2023. In 2024, interest rates are expected to decline, with the anticipated Fed funds rate being 3.9% for that year. Over the long-term, the Fed funds rate is expected to normalize at 2.5%.
Overall, FOMC members anticipate slower economic growth, higher inflation, a weaker labor market, and higher interest rates in the coming months and years. While these forecasts can be disheartening, businesses that stay attuned to changes in the economy and monetary policy can tailor their decisions to lessen the impacts and take advantage of opportunities that arise from the changing economic landscape.
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