If you were looking for a surprise from the Federal Reserve today, you didn't get it. Market consensus was for a 0.75% rate hike by the FOMC today and that is what we got - taking the overnight funds target to 3.25% and matching the Bank of Canada's rate. In terms of the language in the statement, there was no real difference from the July meeting, including the Fed's commitment to continued tightening in order to arrest inflation. While there is a long time between today and the next FOMC meeting on November 2nd, with plenty of information that will likely show a further weakening of the US economy, market participants are reading only one thing into today's decision and that is the higher probability this central bank drives the economy into recession. 

With today's decision, the Fed also revised down its projections for economic growth and raised its estimates for the unemployment. That said, the so-called "dot plot" shows a high fed funds rate forecast of above 4.25 before the end of this year. That would imply a further increase of 0.75% in November and another quarter-point move in December. The reaction from investors was intuitive. Stocks reversed modest gains before the rate decision and turned negative, while the 2yr US government bond yield jumped to 4.1%. Keep in mind that this yield was 0.2% on this date last year. With this, the US dollar strengthened further and this has sent the Loonie down to the 74-1/2 cent area. 

Our view on this has been clear. The North American economy is already weakening and we haven't even seen the full effects of rate hikes before today. The added tightening is going to pressure households and businesses and I would expect growth to show a significant deterioration in the fourth quarter. There is scope  that evidence of this weakening will wake central banks up to the risk of an economic train wreck before their next decisions. If so, we may not see policy rates reach 4% and that would allow the economy to avoid a major recession. If not, then our forecast will be for a painful correction in the economy and markets into 2023.