I thought that you may be interested in a summary of our Chief Economist Dr. Jeffrey J. Roach's thoughts on the latest Federal Reserve Bank actions yesterday.
A year ago today, the federal funds rate was close to zero, consumer price inflation reached 7.9%, and yet the 10-year Treasury yield was 1.79%. What a difference a year makes. Inflation clearly had more upside and from this vantage point, the Federal Reserve (Fed) was late in pursuing price stability.
As expected, the Federal Open Market Committee (FOMC) raised target rates yesterday by just 0.25% to a range of 4.50%–4.75%. After raising rates at the fastest clip since the 1980s, today’s fed funds rate is the highest since 2007. The rapid rise in rates has indeed tamed inflation. After reaching a peak last year, inflation rates have clearly decelerated as tighter financial conditions and better supply chains have both reversed the inflation trend.
Inflation is poised to ease further in the coming months, which will give the Fed some leeway to end its rate hiking campaign. The FOMC will likely hike rates again by 0.25% on March 22, but the debate builds about potential decisions made on May 3 (our best guess at this point is the Fed pauses in May). And most importantly, investors should remember that history shows that markets respond favorably after the end of a rate hiking cycle.
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