Updated FOMC call: Fed to hike policy rate by 75 basis points
REAL ECONOMY BLOG | June 14, 2022
Authored by RSM US LLP
The economist John Maynard Keynes once famously quipped, “When the facts change, I change my mind.” And so it goes ahead of the Federal Open Market Committee’s policy meeting this week.
Based on movements inside the rate markets, quickly changing inflation expectations and a rattled investor class, we now expect the Federal Reserve on Wednesday to raise its policy rate by 75 basis points to a range between 1.25% and 1.50%. This reflects a change from our previous call of a 50 basis-point hike that we published on Monday.
The Fed will continue to lift the policy rate until its stands in a range between 3.25% and 3.5%.
In addition, we anticipate that the Fed will raise its policy rate by 50 basis points at its July and September meetings and then continue to lift the policy rate by 25 basis points until its stands in a range between 3.25% and 3.5%. At that point, it will consider pausing the increases to ascertain changes in the underlying real economy, inflation expectations, unemployment and financial conditions.
The unrelenting increases in inflation have precipitated an upheaval in the financial markets and have caused a significant tightening in U.S. financial conditions.
By end of day Monday, our RSM US Financial Conditions Index had fallen to 1.3 standard deviations below zero, indicating excessive levels of risk being priced into financial assets. In previous decades, these levels of risk have been associated with major disruptions in the business cycle and outright recessions.
Not only is the Federal Reserve faced with the risk of inflation becoming embedded into consumer and business expectations, but it must also factor market behavior into its policy decisions.
The era of low interest rates has spawned greater demand for speculative investments, which by their nature can lead to large swings in returns—from outsized gains to outsized losses.
The question for policymakers becomes to what degree the financial sector will be directly or indirectly affected by those swings and how best to mollify that exposure. We now call on the central bank to hike rates in such a way to restore investor confidence and maintain well-anchored medium to long-run inflation expectations.
Call us at (800) 624-2400 or fill out the form below and we'll contact you to discuss your specific situation.
This article was written by Joseph Brusuelas and originally appeared on 2022-06-14.
2022 RSM US LLP. All rights reserved.
RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each is separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/about us for more information regarding RSM US LLP and RSM International. The RSM logo is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.
Weinlander Fitzhugh is a proud member of the RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.
Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise and technical resources.
For more information on how Weinlander Fitzhugh can assist you, please call (989) 893-5577.