Research

Menu

Back

Choose Language

June 16, 2022

News

The Fed’s first 75bp hike since 1994

  • The Fed hiked the federal funds rate by 75bps to the 1.5% to 1.75% range – the largest single increase since 1994 - and announced a continuation of its balance sheet runoff
  • Powell: “either a 50 or 75 basis point increase seems most likely at our next meeting", leaving the door open for another 75-basis-point rate hike
  • Newly released quarterly economic projections showed a median projection of personal consumption expenditures (PCE) inflation is 5.2% in the fourth quarter of this year, up from 4.3% in March projection. Median projection of PCE inflation falls to 2.6% by 2023, and to 2.2% by 2024.
  • Fed officials' median projection of GDP growth in the fourth quarter of 2022 is 1.7%, lower than the 2.8% projected in March.
  • Dot plot (chart below): the median FOMC projection for federal funds rate at the end of this year is now 3.4%, much higher than the 1.9% projected in March. Median projection for 2023 year-end federal funds rate is 3.8%.

Two weeks ago, almost no one was expecting a hike of 0.75%. But the inflation numbers (8.6% yoy) reported last Friday sent shudders through markets, with inflation at the consumer level unexpectedly accelerating last month. It dashed hopes on Wall Street that inflation may have already peaked, and the data seemingly compelled the Federal Reserve to adopt a more aggressive stance. The Fed has been criticized for moving too slowly to rein in inflation. Other central banks around the world are also raising interest rates, adding to the pressure.

Following the announcement, stocks climbed - halting a five-day rout - and Treasury yields went lower. Powell’s press conference came across much less hawkish than the initial message from the 75 basis-point increase and upgraded rate projections for 2023. A “flexible hawkish FED” came across as what markets were hoping for.

Still, the move on Wednesday was more hawkish than the 50-basis-point shift previously signaled by the Chair but markets were expecting a 75bps hike so the Fed could proceed without sending shockwaves through the market. In 1994, following the 75bp hike, the Fed managed to avoid a recession. Can the Fed achieve the same kind of soft landing in 2022? The difference this time is that the Fed is further behind the curve. Back then, the Fed was tightening ahead of inflation.

Powell will testify before Congress over two days next week, where he can expect to be challenged over his central bank’s performance.

The Fed’s Dot Plot

Source: Bloomberg, BIL

The task of shrinking the Federal Reserve’s $9tn balance sheet has also begun. The Fed will cap the run-off at an initial pace of $30bn a month for Treasuries and $17.5bn for agency mortgage-backed securities, before ramping up over three months to a maximum pace of $60bn and $35bn, respectively, amounting to as much as $95bn per month. While quantitative tightening has been well communicated, investors are not clear what the impact will be of a process that has never been attempted at such scale before.

The Fed’s Balance Sheet ($ trillions)

Source: Fed, BIL

Disclaimer

All financial data and/or economic information released by this Publication (the “Publication”); (the “Data” or the “Financial data and/or economic information”), are provided for information purposes only, without warranty of any kind, including without limitation the warranties of merchantability, fitness for a particular purpose or warranties and non-infringement of any patent, intellectual property or proprietary rights of any party, and are not intended for trading purposes. Banque Internationale à Luxembourg SA (the “Bank”) does not guarantee expressly or impliedly, the sequence, accuracy, adequacy, legality, completeness, reliability, usefulness or timeless of any Data. All Financial data and/or economic information provided may be delayed or may contain errors or be incomplete. This disclaimer applies to both isolated and aggregate uses of the Data. All Data is provided on an “as is” basis. None of the Financial data and/or economic information contained on this Publication constitutes a solicitation, offer, opinion, or recommendation, a guarantee of results, nor a solicitation by the Bank of an offer to buy or sell any security, products and services mentioned into it or to make investments. Moreover, none of the Financial data and/or economic information contained on this Publication provides legal, tax accounting, financial or investment advice or services regarding the profitability or suitability of any security or investment. This Publication has not been prepared with the aim to take an investor’s particular investment objectives, financial position or needs into account. It is up to the investor himself to consider whether the Data contained herein this Publication is appropriate to his needs, financial position and objectives or to seek professional independent advice before making an investment decision based upon the Data. No investment decision whatsoever may result from solely reading this document. In order to read and understand the Financial data and/or economic information included in this document, you will need to have knowledge and experience of financial markets. If this is not the case, please contact your relationship manager. This Publication is prepared by the Bank and is based on data available to the public and upon information from sources believed to be reliable and accurate, taken from stock exchanges and third parties. The Bank, including its parent,- subsidiary or affiliate entities, agents, directors, officers, employees, representatives or suppliers, shall not, directly or indirectly, be liable, in any way, for any: inaccuracies or errors in or omissions from the Financial data and/or economic information, including but not limited to financial data regardless of the cause of such or for any investment decision made, action taken, or action not taken of whatever nature in reliance upon any Data provided herein, nor for any loss or damage, direct or indirect, special or consequential, arising from any use of this Publication or of its content. This Publication is only valid at the moment of its editing, unless otherwise specified. All Financial data and/or economic information contained herein can also quickly become out-of- date. All Data is subject to change without notice and may not be incorporated in any new version of this Publication. The Bank has no obligation to update this Publication upon the availability of new data, the occurrence of new events and/or other evolutions. Before making an investment decision, the investor must read carefully the terms and conditions of the documentation relating to the specific products or services. Past performance is no guarantee of future performance. Products or services described in this Publication may not be available in all countries and may be subject to restrictions in some persons or in some countries. No part of this Publication may be reproduced, distributed, modified, linked to or used for any public or commercial purpose without the prior written consent of the Bank. In any case, all Financial data and/or economic information provided on this Publication are not intended for use by, or distribution to, any person or entity in any jurisdiction or country where such use or distribution would be contrary to law and/or regulation. If you have obtained this Publication from a source other than the Bank website, be aware that electronic documentation can be altered subsequent to original distribution.

As economic conditions are subject to change, the information and opinions presented in this outlook are current only as of the date indicated in the matrix or the publication date. This publication is based on data available to the public and upon information that is considered as reliable. Even if particular attention has been paid to its content, no guarantee, warranty or representation is given to the accuracy or completeness thereof. Banque Internationale à Luxembourg cannot be held liable or responsible with respect to the information expressed herein. This document has been prepared only for information purposes and does not constitute an offer or invitation to make investments. It is up to investors themselves to consider whether the information contained herein is appropriate to their needs and objectives or to seek advice before making an investment decision based upon this information. Banque Internationale à Luxembourg accepts no liability whatsoever for any investment decisions of whatever nature by the user of this publication, which are in any way based on this publication, nor for any loss or damage arising from any use of this publication or its content. This publication, prepared by Banque Internationale à Luxembourg (BIL), may not be copied or duplicated in any form whatsoever or redistributed without the prior written consent of BIL 69, route d’Esch ı L-2953 Luxembourg ı RCS Luxembourg B-6307 ı Tel. +352 4590 6699 ı www.bil.com.

Read more


More

January 10, 2025

News

Video summary of our Outlook 2025

2024 - The US economy exhibited impressive strength powered by consumption, while Europe struggled with weak demand and a protracted manufacturing downturn 2025 - The...

December 27, 2024

News

BIL Investment Outlook 2025 – T...

  Introduction from our Group Chief Investment Officer, Lionel De Broux       As the oldest private bank in Luxembourg, we’ve been managing clients’...

December 20, 2024

Weekly Insights

Weekly Investment Insights

  Having spent ten straight days decked out in red, the Dow Jones Industrial Average index recorded is longest losing streak since 1974. Other global...

December 13, 2024

Weekly Insights

Weekly Investment Insights

  It has been a big week for France, with Notre Dame finally reopening after five years of reconstruction, and Francois Bayrou being named France’s...

December 9, 2024

Weekly Insights

Weekly Investment Insights

  December is here, and while the cold, dark days may not be everyone's cup of cocoa, the festive spirit is starting to set in....

All articles