Fed raised rates by 75 bps: ‘they’re responding to backward-looking indicator’

on Jun 15, 2022
  • U.S. Federal Reserve raised benchmark interest rates by 75 basis points.
  • Western Asset's John Bellows says it might prove out to be a mistake.
  • The S&P 500 index is up roughly 3.0% following the FOMC meeting.

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The S&P 500 index is up nearly 3.0% on Wednesday after the U.S. Federal Reserve announced its biggest rate hike since 1994.

A brief recap of the FOMC meeting

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  • Benchmark interest rates raised by 75 basis points
  • A 50 – 75 bps increase expected in the July meeting
  • Year-end target for the federal funds rate lifted to 3.4%
  • Outlook for economic growth in 2022 lowered to 1.7%

The benchmark rate is now in the range of 1.5% to 1.75% – highest since the first quarter of 2020. FOMC remains confident that headline inflation will come down sharply in 2023 to 2.6%. Chair Jerome Powell said:

I do not expect moves of this size to be common. But we’ll make decisions meeting by meeting and we’ll continue to communicate our thinking as clearly as we can. We want to see progress. If we don’t see progress, that could cause us to react.

Expert reacts to the 75-bps increase

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Reacting to the rate hike on CNBC’s “Power Lunch”, John Bellows (Portfolio Manager at Western Asset) said there’s a risk that a 75 basis points increase will prove out to be a mistake.

Fed is responding to last week’s CPI print that, at least parts of it, tend to be backward looking. So, the risk is, they’re responding to backward-looking indicator while forward-looking indicators do signal a turn in activity and probably in prices.

U.S. inflation hit a new forty-year high of 8.6% in May versus the Dow Jones estimate of 8.3%.

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