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Thursday, June 16, 2022
Today's newsletter is by Myles Udland, senior markets editor at Yahoo Finance. Follow him on Twitter @MylesUdland and on LinkedIn.
The Federal Reserve raised interest rates by 0.75% on Wednesday, the most since 1994.
And beyond the historic move, the central bank gave investors plenty to ponder about how Fed officials see the economy evolving in the coming years.
Specifically: Despite Fed Chair Jay Powell's protestations on Wednesday, the outlines of a recession are apparent in the Fed's own forecasts.
In a note following Wednesday's statement, Renaissance Macro's Neil Dutta argued the Fed's latest Summary of Economic Projections (SEP) offer a simple outline: "Slower growth and a more aggressive Fed is a recipe for a recession."
The SEP published Wednesday showed GDP growth this year is expected to hit just 1.7%, down from the 2.8% forecasted in March. Headline inflation at the end of this year, meanwhile, is now expected to be 5.2% — up from 4.3% in March forecasts — while interest rates are expected to be 3.4% at year-end, up from 1.9% in March's outlook.
Dutta also highlighted two changes to the Fed's policy statement published Wednesday.
First, the Fed removed a reference to expectations the labor market will remain strong.
Second, the central bank said it is "strongly committed" to bringing inflation back to its 2% goal. In May, the Fed said it believed "appropriate firming in the stance of monetary policy" would return inflation to 2% with the labor market remaining strong.
"What does that tell you?" Dutta asked. "Unemployment is going up and [the Fed is] good with it to get inflation down."
The Fed's forecasts further suggest the central bank will be cutting interest rates come 2024, a move that typically accompanies a softening in the economy.
Economists at Bank of America Global Research said they were "deeply skeptical" of this forecast.
"We continue to believe that when push comes to shove, the Fed compromises, pushing up the unemployment rate more than their forecast assumes and accepting underlying inflation of up to 3%," the BofA economists led by Ethan Harris wrote in a note to clients. "As we have noted before, even the anti-inflation giant Paul Volcker only brought inflation down to 4%."
When asked about whether tamping down inflation would require increasing unemployment, Powell demurred on Wednesday, saying the Fed is "not looking to have a higher unemployment rate."