Expectations of a soft landing disappeared after Wednesday’s FOMC meeting. The question, now, seems to be how badly there will be a hard landing. Things couldn’t have been more hawkish with the Fed dot plot showing a benchmark interest rate of 4.4% by the end of this year, as well as a terminal rate of 4.6% in 2023 (from 3.25% and 3.8%, respectively). Weaker growth forecasts and higher inflation estimates were also included in the projections, with the unemployment rate reaching 4.4% and resulting in job losses of over a million, assuming it there is no change in the size of the US workforce.
Transcript Highlights: “We need to put inflation behind us. I wish there was an easy way to do that. There isn’t,” Fed Chairman Jerome Powell said. “Reducing inflation will likely require a prolonged period of below-trend growth and there will most likely be an easing of labor market conditions. Restoring price stability is essential to set the stage for achieving employment maximum and long-term stable prices. We will continue until we are sure that the job is done.”
While a small relief rally took place after the Fed raised rates by 75 basis points – instead of a colossal percentage point – the sentiment did not last. The main stock market averages closed the session down 1.7%, while the 10-year Treasury yield jumped 7 basis points to 3.64% and the shorter-dated 2-year yield jumped 15 basis points to 4.11%. Futures contracts were no less volatile overnight, hovering between 0.7% gain and losses of almost 2%as investors worry about the state of the economy and the Fed is willing to tolerate a painful recession as a key compromise to contain inflation.
Example : “The housing price deceleration we’re seeing should help bring prices more closely in line with rents and other housing market fundamentals. And, you know, that’s a good thing,” Powell continued. “Longer term, what we need is for supply and demand to be better aligned, so that house prices rise at a reasonable level, at a reasonable pace, and people can once again afford houses. And I think we — so we probably in the housing market have to go through a correction to get back to that place.”