Fed executes steepest rate hike in decades. At its June 15 meeting, the Federal Open Market Committee (FOMC) raised the federal funds rate 75 basis points to a target range of 1.50 percent to 1.75 percent. This was the largest single increase since November 1994 and brings the total year-to-date advancement to 150 basis points. Additional rate hikes are anticipated through the rest of the year, likely lifting the year-end target range into the 3.50 percent zone for the first time since before the Global Financial Crisis. These actions are applying substantial upward pressure to short-term interest rates. To lift longer-term rates, the Fed has also initiated quantitative tightening. The central bank is reducing its balance sheet at a measured pace of $47.5 billion per month from June to August, before accelerating to $95 billion beginning in September. The plan could adjust if economic risks shift.

Causes of inflation outside of central bank’s control. Previous guidance from Chairman Jerome Powell had prompted the market to anticipate a 50-basis-point increase in June. The FOMC’s decision to accelerate that pace was driven by decades-high inflation in May when headline CPI grew 8.6 percent year-over-year, due largely to factors outside of the Fed’s control. Global supply chains remain beleaguered by COVID-19 lockdowns in China and the war in Ukraine. This is leading to a shortage of goods globally and at home, lifting prices. The conflict in Eastern Europe is also disrupting food and energy markets. Nearly half of last month’s multidecade-high jump in inflation was driven by greater food and energy costs. Removing those two categories, core CPI advanced 6.0 percent year-over-year in May, a slight deceleration from recent months. Nevertheless, several domestic factors continue to apply upward pressure to a range of prices.

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* Sources: Marcus & Millichap Research Services; Chatham Financial; Federal Reserve; Moody’s Analytics