The Federal Reserve -- as it made its monetary policy statement Wednesday -- is boosting the Fed Funds rate by three-quarters of a percentage point to a target of 3% to 3.25%. The Fed is also telegraphing likely additional rate hikes in the coming months.
In its updated Economic Projections, the Fed now sees gross domestic product cuts across the board for 2022, 2023, and 2024. It now sees GDP of just 0.2% in 2022, down from its prior forecast of 1.7% in June. Given the GDP figures for the first half of 2022 and slowing economic data received so far in the current quarter, we're not surprised by the size of that cut although it could catch many market watchers off guard. To us the larger question is the logic behind the Fed seeing GDP rebound to 1.2% in 2034 vs. its prior forecast of 1.7%, given that it sees the Fed Funds rate hitting 4.4% this year, climbing further to 4.6% in 2023.
That 4.4% Fed Funds rate for 2022 suggests the November and December monetary policy meetings would collectively add another one to one-and-a-quarter percentage points. Heading into this Fed meeting, the market was adjusting to the view the Fed Funds rate could be north of 4% exiting 2022, but that new forecast is likely to lead to another round of expectation resetting. When it comes to the Fed, they are somewhat of a cheerleader no matter what the economic data is signaling, and that means it could once again misread recession risk.
The Fed reminded also on Wednesday that it's reducing its Treasury security holdings and that it is "strongly committed" to returning inflation to its 2% objective -- though it promised to adjust policy if new risks emerge that could throw off its goals. We have no doubt that Fed Chair Jerome Powell will see his 2% inflation goal met, but taking rates up to levels below current inflation has us concerned the Fed is not doing enough with the stickiness of inflation. The statement that followed was pretty much in line with recent Fed comments and Chair Powell's speech at the Jackson Hole economic symposium. Market volatility is high, as implied volatility remains elevated with the Volatility Index at 27%. We might see more big movements such as this in the near future -- Wednesday's range has been more than 80 points or 2% on the S&P 500.
We believe the Fed is likely to "go bigger, for longer" -- as we've said -- and policy statement and economic projections suggest that is the path ahead. We expect the fallout will include a number of revisions for interest rates, borrowing costs, the dollar, GDP and corporate earnings. As that resetting occurs, we have our inverse exchange-traded fund positions and cash to insulate us and as the market comes in we'll continue to look for opportunities to position the portfolio for the coming quarters. Defensive and inelastic business models as well as dividend payers and predominantly domestic businesses, especially those being lifted by stimulus spending out of Washington, will remain a focus, but we will consider compelling opportunities on a case-by-case basis.
To sum it up, the Fed is making its best effort to snuff out inflation, albeit a bit too late. We think it is smart to take a prudent and cautious approach until the committee can get a better handle on things.