WASHINGTON – The Federal Reserve on Wednesday passed a rate hike of a quarter of a percentage point, cautioning about the recent banking crisis and signaling that interest rate hikes are coming to an end.
Along with the ninth increase since March 2022, the Federal Open Market Committee noted that future increases are not certain and will depend largely on incoming data.
“The committee will closely monitor the incoming information and assess the implications for monetary policy,” the FOMC statement said after the meeting. “The Committee expects that some additional policy firming may be necessary to implement monetary policy sufficiently restrictive to bring inflation down to 2 percent over time.”
That wording differs from previous statements that “continued increases” would be appropriate to reduce inflation. Stocks fell during Fed Chairman Jerome Powell’s press conference. Some took Powell’s remarks as if the central bank could be nearing the end of its cycle of rate hikes, though he qualified that to say the inflation battle is not over.
“The process of bringing inflation back to 2% has a long way to go and is likely to be bumpy,” the central bank chief said at his post-meeting press conference.
However, Powell acknowledged that recent events in the banking system were likely to lead to tighter credit conditions.
The soothing tone in the central bank’s prepared statement came amid a banking crisis that raised concerns about system stability. The statement pointed to the likely impact of the events.
“The US banking system is healthy and resilient,” the committee said. “Recent developments are likely to lead to tighter credit conditions for households and businesses and weigh on economic activity, recruitment and inflation. The magnitude of these effects is uncertain. The Committee remains very alert to inflation risks.
At the news conference, Powell said the FOMC considered a pause in rate hikes in light of the banking crisis, but ultimately unanimously approved the decision to raise rates because of interim data on inflation and the strength of the labor market.
“We are determined to restore price stability and all evidence shows that the public has confidence that we will do that, which will lead inflation to fall to 2% over time. It is important that we maintain that confidence, also with our actions.” as our words,” said Powell.
The increase brings the benchmark federal funds rate to a target range of between 4.75% and 5%. The rate determines what banks charge each other for overnight loans, but extends to a wide range of consumer debts such as mortgages, car loans and credit cards.
Forecasts released along with the interest rate decision point to a spike of 5.1%, unchanged from the last estimate in December and indicative that a majority of officials expect only one more rate hike.
Data released along with the statement shows that seven of the 18 Fed officials who submitted estimates for the “dot plot” see rates moving above the 5.1% “final rate.”
The forecasts for the next two years also showed considerable disagreement among members, which was reflected in a wide spread among the “dots”. Still, the median estimates point to a 0.8 percentage point reduction in rates in 2024 and 1.2 percentage point reductions in 2025.
The statement removed all references to the impact of the Russian invasion of Ukraine.
Markets closely watched the decision, which came with a higher degree of uncertainty than is typical for Fed moves.
Jerome Powell, Chairman of the U.S. Federal Reserve, speaks at a news conference following a Federal Open Market Committee (FOMC) meeting in Washington, DC, on Wednesday, March 22, 2023.
Al Drago | Bloomberg | Getty Images
Earlier this month, Powell had signaled that the central bank may need to take a more aggressive path to curb inflation. But a rapidly unfolding banking crisis thwarted any idea of a more aggressive move – adding to overall market sentiment that the Fed will cut rates before the end of the year.
Estimates released Wednesday of where members of the Federal Open Market Committee see rates, inflation, unemployment and gross domestic product underlined uncertainty for the policy path.
Officials have also revised their economic forecasts. They raised their inflation expectations slightly, at 3.3% for this year, compared to 3.1% in December. Unemployment was cut a notch to 4.5%, while the outlook for GDP slid down to 0.4%.
Estimates for the next two years have changed little, except that the GDP projection in 2024 has fallen from 1.6% in December to 1.2%.
The forecasts come amid a volatile backdrop.
Despite the banking turmoil and volatile monetary policy expectations, markets have held up. The Dow Jones Industrial Average is up about 2% over the past week, even though 10-year Treasury yields are up about 20 basis points, or 0.2 percentage points, over the same period.
While data from late 2022 pointed to some softening in inflation, recent reports have been less encouraging.
The price index for personal consumption expenditures, a favorite inflation measure for the Fed, rose 0.6% in January and was 5.4% higher than a year ago – 4.7% when excluding food and energy. That’s well above the central bank’s 2% target, and the data prompted Powell on March 7 to warn that interest rates were likely to rise more than expected.
But the banking problems have made decision-making difficult, as the pace of Fed tightening has contributed to liquidity problems.
Closures of Silicon Valley Bank and Signature Bank, and capital issuances Credit Switzerland And First Republichave expressed concern about the state of the sector.
While large banks are considered well-capitalised, smaller institutions have faced liquidity challenges due to rapidly rising interest rates, depreciating otherwise safe long-term investments. For example, Silicon Valley had to sell bonds at a loss, causing a crisis of confidence.
The Fed and other regulators intervened with emergency measures that appear to have eased immediate funding problems, but concerns remain about how deep the damage is in regional banks.
At the same time, recession concerns persist as rate hikes work their way through the economic conduits.
An indicator produced by the New York Fed based on the spread between 3-month and 10-year Treasuries estimated the probability of a contraction over the next 12 months to be about 55% as of the end of February. Since then, the yield curve inversion has increased.
However, the Atlanta Fed’s GDP tracker estimates first-quarter growth at 3.2%. Consumers continue to spend – although credit card use is increasing – and the unemployment rate was 3.6%, while wage growth was robust.