What you need to know about Fed’s latest rate hike

Stocks fell yesterday after an already hawkish Fed doubled down with more hawk-talk. A +75 basis-point hike happened, was mostly expected, but the delivery was somewhat painful to those holding out for some positive overtures.

Rates rising – leaves falling. Those warm summer days… and lower interest rates drift away as the Autumnal Equinox rolls in, and the Fed stays ever determined to kill inflation. Well, technically, Fall, the equinox comes tonight if you live on the east coast. Ok, ok, no time to wax poetic on the change of seasons, we have some Fed business to take care of today, so let’s just jump in.

You read this note daily ( 😉 ) so you are well-aware that the Fed was going to raise its key lending rate by at least +75 basis points. You also know that the markets expected the +75-basis point bump. So then, why all the fuss? Moreover, is the fuss even warranted. We should begin with the psychology around the Chairman’s comments after the announcement. He said, “My main message has not changed at all since Jackson Hole.” That message was a pivotal one as it essentially shut down all hopes that the Fed was considering a policy pivot. In Jackson Hole there was no hug, not even a wink… or a smile, it was unadulterated hawkishness. Yesterday’s message was similar but with a few more embellishments. The most important takeaway from the comments was that pain is coming (the Fed knows it) and that a so-called soft landing was becoming less likely. That sounds rough… if you haven’t been paying attention and have some misguided belief that the Fed was going to talk about lowering interest rates. I often speak about how the Fed’s body language is an important policy tool, so when the Fed raises its hackles and flashes its fangs in order to look scary, it is hoping that consumers will, perhaps, cut back on demand and let prices moderate. If that is not enough, the Fed will beat consumers into submission by raising borrowing costs to the point that certain purchases will become cost prohibitive. On that point, let us look at what the Fed is up to on that front. Everything can be found in the Fed’s official FOMC Projections, which are released 4 times a year; yesterday was one of those dates.

I know that the above picture will be tough to read on a phone screen, but please bear with me… it is important. To begin with, the Fed is expecting Fed Funds to end the year at 4.4%. This is not news to you, if you have been reading my notes. However, you can see that the Fed has become more hawkish since its June projection, by a full percentage point. Also, not news, considering the economic numbers that have been released since early summer. The projections expect rates to peak somewhere in 2023 and begin to moderate in 2024. However, the bulk of the rate hikes will happen, according to policymakers, between now and the end of the year. Essentially another four to five +25 basis-point hikes over the next 2 meetings. The Fed’s goal is to cause the economy (GDP) to slow to below the long-run growth rate of around +1.8%. The Fed expects the economy to grow by +0.2% for this year and a below average +1.2% next year. Notable here is that this year’s growth is frighteningly close to declining and how much the projections were revised downward since last quarter’s release. Powell explicitly mentioned that unemployment would need to rise in order to achieve its goals. Though I didn’t circle it, you can see that that the Fed is expecting unemployment to peak next year at 4.4% and persist through 2024. In his comments, Powell also stated that the hot housing market would have to cool off and that higher interest rates would affect such a decline. Um, Mr. Chair, that is already happening, in case you haven’t seen the latest numbers. This morning, 30-year fixed mortgage rates are at 6.43%. That is more than double from where they started in 2022, and the highest since 2002. Why is the Fed doing all this? To lower inflation, of course. It believes that inflation now at +6.3% (according to the PCE Deflator), will moderate to +5.4% by year end, fall to a far-more palatable +2.8% next year, and ultimately return to the Fed target +2.0% in 2024.

That is a lot of pain, largely on yours and my shoulders, to get inflation down, but sometimes you have to take bitter medicine to heal. So, is all the market fuss warranted? The short answer is no. Most of what we learned yesterday was largely expected and baked into the markets. However, there is always hope that, maybe, the Fed would show some benevolence to stock investors. Unfortunately, yesterday, that benevolence was absent. Also… hope is not a strategy. Stay focused on the facts. Even though the markets are trying our collective patience, we know what we have to do to achieve long-term success. Stay focused on those goals.


Stocks fell in a volatile session yesterday as the Fed delivered its largely expected policy along with uncomfortable rhetoric. The S&P 500 Index fell by -1.77%, the Dow Jones Industrial Average dropped by -1.70%, the Nasdaq Composite Index lost -1.79%, and the Russell 2000 Index declined by -1.42%. Bonds gained and 10-year Treasury Note yields slipped by -3 basis points to 3.52%. Cryptos slipped by -0.39% and Bitcoin gave up -0.25%.


  • Initial Jobless Claims (Sept 27) is expected to come in at +217k after last week’s +213k claims.
  • Leading Economic Index (August) may have pulled back by -0.1% after falling by -0.4% a month earlier.


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