The first rate hike of this cycle in March feels awfully far away. After starting moderately, the FOMC today elected to execute the largest rate hike in more than a quarter century on the backs of rising consumer inflation expectations.

  • The Federal Reserve raised overnight interest rates 75 basis points to a range of 1.50–1.75%, the first hike of that magnitude since 1994
  • Make no mistake: This is a hawkish 75bps hike, with Powell likely to emphasize ability to go even faster if needed
  • The path of rate hikes appears to be steepening, with 300bps more priced in before cycle end, easily enough to trigger a recession
  • Dot plot has federal funds rate peaking at 3.75% in 2023 before rate cuts emerge in 2024, presumably in the face of an economic recession

While we anticipated a 50bps increase in rates heading into this week, the Fed leaked a planned 75bps and today made good on those plans. Interest rate increases of this margin will sharply slow financing-sensitive sectors of the economy (housing and autos), drastically increasing the probability of recession. The complicated part comes if inflation remains high into the early part of any downturn, which will limit the Fed’s ability to respond to slowing conditions and extend a brief recession to a much longer one.

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Guy LeBas

Director, Custom Fixed Income Solutions

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