Tighten: hike interest rates by 75BP as scheduled. Fed's June FOMC meeting decided to raise interest rates by 75BP, the first time since November 1994 to raise interest rates by 75BP, in line with market expectations. The meeting did not adjust the reduction plan. In addition, the Fed still emphasizes that the economy is strong, and the Fed is more concerned about inflation risks than the economy.
Expectations: Downward economic growth, upward inflation. The economic forecast for 2022 and 2023 is significantly lowered to 1.7% (previously 2.8% and 2.2% respectively), and the economic forecast for 2024 is lowered to 1.9%. The unemployment rate forecast for 2022-2024 is slightly raised by 0.2 percentage points, 0.4 percentage points and 0.5 percentage points. The PCE forecast for 2022 is significantly raised to 5.2%, but the PCE forecast for 2023 and 2024 is lowered by 0.1 percentage points, respectively.
Dot Plot: Rate cuts may begin in 2024. The Fed's dot plot shows that all 18 members expect to raise interest rates at least 12 times to 3.0% in 2022 (25BP each time), and the expected interest rate center in 2022 will be significantly raised from 1.9% in March to 3.4%. On this basis, the interest rate will be raised 1-2 times in 2023, and the interest rate center will be raised to 3.8%; however, nearly 80% of the members believe that the interest rate will be cut in 2024. In addition, Powell emphasized that raising interest rates by 75BP is not the norm.
The risk of stagflation is increasing. Considering that U.S. inflation may remain high, the current rate hike path may not be enough to curb U.S. inflation and inflation expectations, and the Fed needs to tighten monetary policy faster in the short term. Although the economic growth rate has dropped slightly, the unemployment rate is still at a historically low level. Economic growth is not the core contradiction of the Fed, but inflation. With the gradual withdrawal of the Fed's stimulus policy, high prices are bound to weigh on the amount of economic growth, and the risk of stagflation in the United States is also increasing.