Fed hikes by 75bp, guides towards slightly higher rate path

The Federal Reserve delivered a widely-expected 75 basis point interest rate hike, alongside a slightly more aggressive outlook for monetary policy in the near-term.

Following the move, the target range for the Fed funds rate stood at 3.0-3.25%.

In its policy statement, the Federal Open Market Committee said that the "committee is highly attentive to inflation risks".

Wednesday's decision was unanimous.

As on past occasions, the FOMC reiterated that: "[...] The Committee is strongly committed to returning inflation to its 2 percent objective."

In its Summary of Economic Projections, which was released alongside the policy statement, the Fed board's members and regional presidents also pointed towards a slightly higher path for interest rates than expected.

The SEP showed that officials were now expecting the benchmark interest rate to hit 4.4% by the end of 2022 and 4.6% over the course of 2023.

That would be followed by reductions to 3.9% in 2024 and 2.9% in 2025.

According to Bloomberg, traders had been expecting rates would reach 4.5% early next year and fall by 50bp by the end of 2023.

Policymakers' median forecast for US gross domestic product growth in 2022 was slashed from 1.7% in June to 0.2% with an acceleration to 1.2% seen in 2023 (June: 1.7%) and 1.7% in 2024 (June: 1.9%).

In parallel, the core price deflator for personal consumption expenditures was seen edging up from 4.4% in 2022 to 4.6% in 2023, versus the rise to 3.8% seen in the June SEP.

Similarly, core PCE prices were now seen advancing by 3.9% in 2024, up from a prior estimate for a gain of 3.4%.

Implicitly, the above forecasts entailed positive interest rates in inflation adjusted terms over the next two years and a bit less so into 2025.

In response to the FOMC's decision, as of 2003 BST the yield on the benchmark 10-year US Treasury note was dipping by five basis points to 3.515%.

The US dollar index was 0.52% higher alongside at 110.79 after hitting an intra-day high of 111.58 just a few minutes before.

"No let-up in the hawkishness," Ian Shepherdson, chief economist at Pantheon Macroeconomics, said.

"The dotplot for this year is 25bp more aggressive than we expected, though the end-2023 forecast, 4.625%, is in line with our forecasts.

"In short, the forecasts are intended to convey continued determination on the part of the Fed to drive inflation down, but we see room for maneuver, even in the quite short term, if we are right in our view that margin recompression will drive down core inflation faster than the Fed and markets think."