Fed Hikes US Interest Rates by 25bps

The Federal Reserve has hiked the fed funds target rate range 25 basis points to 4.75-5% as largely expected by the markets and economists. This was a unanimous decision with the committee backing the view that “some additional policy firming may be appropriate”.

This is a slight language shift having previously said that “ongoing increases in the target range will be appropriate”.

Their dot plot chart shows that their end-2023 Fed funds median forecast is 5.1%, which is the same as it was in December, whereas surveys of economists suggested an expectation they would have raised that to 5.4%. So again it does appear to be a little more dovish than expected.

Nonetheless, the Fed appears quietly confident the economy won’t be heavily disrupted by recent banking sector woes, ING Economics noted.

It argues that the “US banking system is sound and resilient” so their fourth quarter year-on-year GDP forecast for 2023 has only been cut from 0.5% to 0.4% while 2024 is now 1.2% versus 1.6% expected three months ago.

The unemployment and inflation expectations are little changed. Moreover, the Fed are now looking for only 75bp of rate cuts in 2024 rather than 100bp of cuts that it had projected back in December.

Chair Powell used the press conference to separate the Fed’s price stability role and financial stability role, saying that it has the tools to deal with both, echoing comments from the ECB’s Christine Lagarde last week.

Federal Reserve FOMC statement

Recent indicators point to modest growth in spending and production. Job gains have picked up in recent months and are running at a robust pace; the unemployment rate has remained low. Inflation remains elevated.

The U.S. banking system is sound and resilient. Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. The extent of these effects is uncertain. The Committee remains highly attentive to inflation risks.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run.

In support of these goals, the Committee decided to raise the target range for the federal funds rate to 4-3/4 to 5 percent. The Committee will closely monitor incoming information and assess the implications for monetary policy.

The Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.

In determining the extent of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.

In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook.

The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals.

The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Lisa D. Cook; Austan D. Goolsbee; Patrick Harker; Philip N. Jefferson; Neel Kashkari; Lorie K. Logan; and Christopher J. Waller.