The Fed continues its promise to fight against inflation until it brings the
core inflation down to 2%. Based on the most recent estimates, the Fed
sees the federal funds rate moving to the 4.5-4.75% range by early 2023.
This may lead to some pain in the economy, perhaps recession. Also, this
involves some risk that the Fed's aggressive tightening may potentially
destabilize the financial system in the process.
Volatility has spiked across asset classes, raising concerns about the
ability of the global economy to cope with sharply higher interest rates. If
volatility in the financial market continues, the Fed may end up moderating
The Fed was late to tighten monetary policy, allowing inflation to rise, but
they have made up for lost time since its first-rate hike in March 2022. The
federal funds rate has increased by 300 bps at an accelerating pace, one
of the fastest rate-hiking cycles.
The impact of rate hikes has started working its way through the economy.
GDP growth has slowed, led by weakness in housing and manufacturing.
Moreover, commodity prices have fallen sharply from their peak levels.
The Fed's effort to slow down the demand side of the economy seems to
be working.
We believe market pressures may force the Fed to slow with future rate
hikes. Also, the Fed’s attempt to bring inflation back to 2% could increase
the stress in the global financial market.