The Federal Reserve Open Market Committee (FOMC) voted to raise the target range for the Fed funds rate by 25 basis points, to 4.75% to 5%, on Wednesday. But Fed Chair Jerome Powell indicated that the central bank's series of aggressive rate hikes could be nearing an end.
Because the Federal Reserve believes recent troubles in the banking system are likely to mean tighter credit conditions for households and businesses, it no longer anticipates “ongoing rate increases will be appropriate to quell inflation.”
Instead, the FMOC’s official statement said, “some additional policy firming may be appropriate.” However, Powell also plainly said a cut in interest rates is not in the Fed's base case.
In principle, tightening financial conditions from regional bank failures would be equivalent to a rate hike, Powell said during his press conference. When Silicon Valley Bank (SVB) and Signature Bank failed, the FOMC considered pausing its campaign against inflation but decided to move ahead with a 25 bps hike and instead slightly change guidance.
“Events in the banking system over the past two weeks" could affect economic outcomes, Powell said. “It is too soon to determine the extent of these effects and therefore too soon to tell how monetary policy should respond.”
FOMC Next Steps
The 25 bps increase “was a high conviction decision given there were no dissenters among the FOMC participants,” wrote Jack McIntyre, portfolio manager at asset manager Brandywine Global, in an email. “While the press conference had some hawkish undertones, both the FOMC statement and 'dot plots' increase the odds the Fed could be done raising rates for this cycle.” The dot plots are a graph of Fed participants' estimates of appropriate policy rates.
Most [Fed meeting] participants see the appropriate policy as calling for a lower terminal rate than Fed communications were guiding markets to just a few weeks ago. — BofA Securities Global Research
In the committee’s summary of economic projections released with the FOMC statement, meeting participants judged the Fed funds rate would be 5.1% at the end of this year, 4.3% at the end of 2024, and 3.1% at the end of 2025. That assumes the economy evolves as projected, Powell said. The projections were little changed from December.
After the press conference, economists from BofA Securities lowered their projected terminal Fed funds rate by 25 basis points, to a 5%-5.25% range. That equates to one more rate hike of 25 basis points.
“While Chair Powell said that the true extent of this tightening is unknown and dependent on how well Fed actions to date reduce [banking] spillover risks, he said that most committee members factored this effect into their forecasts,” according to a note from BofA Securities. “Hence, most participants see the appropriate policy as calling for a lower terminal rate than Fed communications were guiding markets to just a few weeks ago."
Higher interest rates and slower output growth also appear to be weighing on business fixed investment. — Jerome Powell, Chair of the Federal Reserve
As of 5 p.m. Eastern, Fed fund futures were implying a 61% probability that the Fed would raise by 25 bps at its next meeting in May.
Stubborn Inflation, Slow Growth
In the summary of economic projections, Fed meeting participants projected at the median that inflation, as measured by the total personal consumption expenditures price index (PCE), would be 3.3% for 2023, 2.5% for 2024, and 2.1% for 2025.
“The process of getting inflation back down to two percent has a long way to go and is likely to be bumpy,” Powell said.
Consumer spending picked up this quarter, possibly from seasonal effects, but housing sector activity remained weak. “Higher interest rates and slower output growth also appear to be weighing on business fixed investment,” Powell said.
FOMC participants continue to expect subdued economic growth in the U.S., forecasting real U.S. GDP growth of just 0.4% this year and 1.2% next year.