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“Fed” Up With Inflation, the Fed Continues to Raise Rates

Evan Witkowski portrait photo

   By Evan Witkowski
   Manager, Institutional Relationships
   September 22, 2022

Yesterday the U.S. Federal Reserve (Fed) raised its benchmark interest rate, the Fed Funds Rate1, by 0.75% for the third time this year, bringing its target range to 3.00%–3.25%. While a year ago, inflation was still considered “transitory” (or temporary), the Fed is now in overdrive, acting aggressively to curb inflation. Following the Fed news, the two-year U.S. Treasury yield broke above 4% for the first time since October 2007. The S&P 500 Index plunged approximately 1.0% in the one minute before and the one minute following the news.

The Fed also provided its expectations for future rate hikes for the remainder of 2022 and beyond, remaining hawkish. We must all keep in mind projections are only as good as the information we have at the time. A year ago, the Federal Reserve underestimated inflation and the impact on short-term interest rates. An important measure of interest rate expectations is the Fed’s “dot plot.” At each Fed meeting, voting members state their expectations for future rate hikes and announce their intentions through this dot plot. In the dot plot charts below, you can see how Fed sentiment has drastically changed relative to a year ago (September 2021).

In September 2021, the median rate projection for September 2022 was 0.25%, with a median expectation of 1.0% at year’s end. The difference in expectations today is startling, with an approximate 3% difference compared to a year ago! This is a clear indication of the Fed’s aggressive shift due to inflation continuing to run high. The median estimate for the 2022 year-end Fed Funds Rate (see Chart 2) is now 4.4%, with the expectation that rates will peak at 4.6% in 2023. Given this unprecedented change in expectations, it is unsurprising that markets, both equities and fixed income, experienced such drastic declines.

Chart 1 - Dot Plot from Sep. 2021 Chart 2 - Dot Plot from Sep. 2022

Each dot represents one Federal Open Market Committee (FOMC) participant’s projection for the midpoint of U.S. interest rates (%) from every meeting since September 2021. Boxplot lines indicate first quartile, median and third quartile values for each annual projection.


From a long-term asset allocation standpoint, as I hope most of our investors already know, Wespath will not make any tactical moves in reaction to the Fed’s continued hikes. While rates go up and down, we’ve positioned our broadly diversified investments for the long-term. While near-term market turbulence is always disconcerting, the strategic focus of our diversified investment strategy and resulting fund performance has stood the test of time. Please contact our team at [email protected] with any questions you may have.



Chart sources:

1 The federal funds market consists of domestic unsecured borrowings in U.S. dollars by depository institutions from other depository institutions and certain other entities, primarily government-sponsored enterprises. Federal Reserve Bank of New York.