Week in Review: June 17, 2022

Markets ended the week lower faced with intensifying recession concerns and the Federal Reserve’s single largest rate hike since 1994. For the S&P 500, which officially entered bear market territory, it was the worst week since March 2020.

Following the release of disappointing Consumer Price Index (CPI) data the prior week, which showed price increases reaccelerated in May, it was widely expected that the Fed would increase rates by 0.75%. On Wednesday, the Fed confirmed predictions, demonstrating its commitment to “returning inflation to its 2% objective.”  Of course, the Fed has little control over most of the supply-side factors currently driving prices higher. What the Fed can control, however, is demand. By raising rates, the Fed is hoping to reduce demand enough to correct current supply demand  imbalances, without triggering a recession, something that Fed Chair Jay Powell has admitted will be “challenging.” Incoming inflation data will be key to how forcefully the Fed continues to act, with Powell indicating that the Fed could hike by another 0.75% at its next meeting if necessary.

As part of the meeting, the Fed updated its famed “Dot Plot” showing the rate expectations of Federal Open Market Committee (FOMC) members.  Compared to the March Dot Plot, the Fed now expects the Fed Funds rate to end 2022 at 3.4%, up from the prior estimate of 1.9%. In addition, the Fed now expects full year Gross Domestic Product (GDP) growth of 1.7%, down from 2.8%, and for core Personal Consumption Expenditures (PCE), the Fed’s preferred measure of inflation, to end the year at 4.3%, up from the prior estimate of 4.1%.