The Federal Reserve’s rate-setting committee raised its benchmark interest rate by 75 basis points and drastically raised its terminal rate estimates, triggering a spike in yields and the dollar. At the conclusion of its two-day meeting, the Federal Open Market Committee unanimously voted to raise the target range for the federal funds rate to 3-to-3.25 percent, with no dissents in favour of a 50 basis point move.

In the official statement laying out the decision, policymakers removed language that previously highlighted a softening in spending and production, instead noting that “modest growth” should be expected.

According to the accompanying Statement of Economic Projections, officials now expect the headline personal consumption expenditure price index to rise 5.4 percent this year before fading to 2.8 percent next year. Unemployment is seen rising to 4.4 percent in 2023, and growth is thought likely to decelerate, with output expanding 1.2 and 1.7 percent in the next two years, down from rates previously expected.

The benchmark federal funds rate is expected to hit 4.4 percent by the end of this year (implying an additional 125-basis points in rate increases over the next two meetings), before peaking next year at 4.6 percent, and falling to 3.9 percent in 2024. Forecasts released in June showed rates touching 3.4 percent this year and 3.8 percent in 2023.

Markets, expecting a more dovish outlook, dropped sharply in the moments after the release. US equities fell, two- and ten-year government bond yields moved higher, and the dollar advanced.

Investor attention is now shifting to the press conference, where Jerome Powell’s comments could send markets careening in the opposite direction.

Karl Schamotta, Chief Market Strategist