After a hectic few weeks in the banking sector, most of the market expected a 25 bp rate hike at today’s meeting. And that’s what the Fed delivered. 👍
Let’s start with the redlined version of the FOMC’s statement from Nick Timiraos:
The Fed raised rates 25 bps
The decision was unanimous
The terminal rate projection is unchanged at 5.1%
FOMC statement modifies guidance: “The committee anticipates that some additional policy firming may be appropriate.” pic.twitter.com/HUMdU1TaTQ
— Nick Timiraos (@NickTimiraos) March 22, 2023
The main change was the fed modifying its guidance, saying, “The committee anticipates that some additional policy firming may be appropriate…” in order to attain a monetary policy stance that’s sufficiently restrictive to return inflation to 2 percent over time. 🕵️
It also added language to reiterate that the banking system is sound and resilient. And while the impact will likely be tighter credit conditions, the extent of the effects is unknown. Besides that, its normal tune continued, acknowledging that employment remains robust and inflation elevated.
The Federal Reserve has reiterated time and time again that its primary goal is bringing inflation down. And recent data shows inflation is still too high, so it was a unanimous decision among policymakers to raise rates by 25 bp. 🗳️
The market was highly anticipating the Federal Open Market Committee’s (FOMC) economic projections, which haven’t been updated since December. Well, there wasn’t much of a change in this month’s figures. Instead, they showed that 17 of 18 officials expect the fed-funds rate to rise to at least 5.1% and stay there through year-end. That implies a single quarter-point increase next meeting before pausing.
Overall, the Fed stuck to its data-dependent narrative. Inflation remains too high, so it’s likely to bring rates to their projected terminal rate of 5.1% and then wait to see what happens. 📝
Stocks and bonds were volatile, as expected. However, they really started to move after Janet Yellen said the Treasury “…is not considering or working on a unilateral expansion of deposit insurance.” That seemed to contradict her earlier comments that more could be done to backstop banks that pose a risk of contagion. Regional bank stocks fell sharply following the comments. 📉
Meanwhile, across the pond, the U.K.’s inflation rate surprised investors by rising to 10.4% in February. And European Central Bank (ECB) President Christine Lagarde gave a speech today titled “The path ahead.” Within it, she reiterated the central bank’s fight against inflation by saying, “But the public can be certain about one thing: we will deliver price stability, and bringing inflation back to 2% over the medium term is non-negotiable.”
In conclusion, today’s meeting was more of the same as the Fed. It and other global central banks continue their fight against inflation and are not backing down despite the recent banking sector troubles. Unless the data changes dramatically, we can expect one more 25 bp hike on May 3rd and then a long pause as the Fed observes the impact of its policies on the economy. ⚔️
For now, we’ll have to see if the market’s initial reaction sticks through the end of the week. 🤷