Good morning: The Federal Market Open Committee delivered exactly what the markets wanted. At its September meeting, the committee voted unanimously to raise the target Federal Funds rate. The Fed Chair needed to follow up on his recent inflation bark with some monetary tightening bite. Indeed, inflation is still running above target. The August jobs report came in stronger than expected, and third-quarter Gross Domestic Product growth is currently tracking 3-4%. The bigger question remains: is this the first step in a series of hikes, or is it a more gradual cadence? I think it is important to remember that the Fed raises interest rates when it believes the economy is "running too hot." A “too hot” economy has the following characteristics:

• Inflation is rising too quickly because demand for goods and services exceeds supply.
• Unemployment is very low, making it harder for businesses to find workers and often pushing wages higher.
• Consumer and business spending is very strong, which can further fuel inflation.

When the Fed raises short-term interest rates:

• Borrowing becomes more expensive for consumers and businesses.
• Mortgage, auto loan, and credit card rates often rise.
• Spending and investment tend to slow.
• Inflationary pressures may ease.

This isn’t the end of the world; the Fed tightening is a tool used to slow things down. Tightening is a better scenario than lowering rates because the economy is faltering. A resolution with geopolitical issues would greatly ease inflation pressures. That is a story for a different day. Have a great week, and call with questions.

Regards,

Don