Fed Set to Ramp Up Rate Hikes To Fight Inflation

As expected, the Federal Reserve Board on Wednesday raised the target range of the

federal funds rate—a key short-term interest rate—by 25 basis points from the current

0-25 bp to 25-50 bp. The move was widely anticipated as a reaction to the historically

high levels of inflation seen in recent months. For example, the consumer price index for

February 2022 rose 7.9 percent from a year earlier—the biggest increase since January

1982.1

 

Looking beyond the immediate news of the day, we see that the Fed expects to

continue raising the fed funds rate during 2022 and into 2023 based on its forecast for

inflation and other factors.

 

As seen in the chart, the Fed’s so-called “dot plot”—in which each Fed official plots one

dot on a grid to show where they think rates are headed—suggests the Fed will raise

rates six more times this year and at least three times next year. That would mean at

least 10 rate hikes in total (counting Wednesday’s increase), bringing the fed funds rate

up to around 2.75 bp by the start of 2024.

 

 

As borrowing costs rise over time, consumers typically spend less—easing the pressure

on prices. Indeed, the market is now pricing the Fed to cut rates once during

2024—suggesting the market believes 10 hikes may be too much for the economy to

handle over the next 18 months.

 

Of course, the Fed’s outlook for the economy and interest rates can and does evolve

as new data emerges. Consider that back in December 2021, Fed officials were

expecting just three rate hikes in 2022 and about six more over the next two years.

As always, we will closely monitor the Fed’s statements and actions regarding inflation

and interest rates—with a particular eye toward how those two factors are impacting

consumer confidence and consumer spending—and we will adjust the portfolios as

necessary to address economic and market conditions.

 

For clients who may be nervous about the short term health of the economy, a strategy

designed to mitigate drawdown risk, while continuing to grow assets may be a fitting

solution. Consider Risk Assist, designed with the goal of protecting wealth, reducing

investor anxiety and combating poor investment decision-making.

 

 

1 Bureau of Labor Statistics 3/10/22. https://www.bls.gov/news.release/pdf/cpi.pdf


This commentary is written by Horizon Investments’ asset management team. For additional commentary and media interviews, contact Chief Investment Officer Scott Ladner at 704-919-3602 or sladner@horizoninvestments.com.

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