The anticipation for yesterday’s FOMC meeting was high. The FED raised interest rates by 0.75%, although there were some small odds in favour of a 100 bps (basis points) rate hike. The US dollar jumped immediately after the FOMC decision, hitting fresh highs but then retreated lower after comments from Jerome Powell.

Highlights of the FOMC rate decision on September 21, 2022

• Federal Reserve interest rate decision +75 bps vs +75 bps expected to 3.00-3.25%
• Prior rates were 2.25-2.50%
• The implied probability of a 100 bps hike was 17% ahead of the FOMC with the remainder at 75 bps
• Prior statement said “Committee is strongly committed to returning inflation to its 2 percent objective”. That’s repeated.
• Recent indicators point to modest growth in spending and production (repeat of last statement)
• Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures
• The Committee is highly attentive to inflation risks (repeat)
• No dissents

Prior to the statement, the November 2 meeting was 70% priced for another 75 bps to 3.75-4.00%, that’s moved up to 89%. There is very little change in the FOMC statement but markets are reacting to the dot plot, which shows higher terminal rates and the Fed holding higher for longer.

Powell’s said that his main message has not changed at all since Jackson Hole, but the USD softened and risk assets turned higher. Although that didn’t last long and the USD turned higher again. The reason for this was the Dot Plot table by the FOMC, which will probably keep the USD bullish, as the FED is expected to deliver another 75 bps hile, followed by a 50 bps hike by the end of 2022 and continue tightening through 2023.

The FOMC Dot Plot

There have been comments for 2024 and 2025 dots but considering that a year ago there wasn’t a single FED dot above 0.75%, things might change fast. The FED will eventually head where the economy and the data takes it. However I think a big risk that markets are fearful about is over-tightening. I think the market can handle 4-5% FED funds rate but the fear trade is if rates go above 5%.