Fed hikes another 25 basis points, hints it may be the last increase

by mcardinal

 

The Federal Reserve on Wednesday raised interest rates by a quarter of a percentage point and signaled it may pause further increases, giving officials time to assess the fallout from recent bank failures, wait on the resolution of a political standoff over the U.S. debt ceiling, and monitor the course of inflation.

The move marks a new stage of the U.S. central bank’s management of the recovery from the COVID-19 pandemic, with what may be its final rate hike of the current tightening cycle and heightened attention to risks facing the economy. The unanimous decision lifted the Fed‘s benchmark overnight interest rate to the 5.00%-5.25% range, the tenth consecutive increase since March 2022.

In an overt shift, the central bank no longer says it “anticipates” further rates will be needed, only that it will watch incoming data to determine if more hikes “may be appropriate.”

The change was reminiscent of language used when it halted rate hikes in 2006, which says that “in determining the extent to which additional policy firming may be appropriate,” officials will study how the economy, inflation, and financial markets behave in the coming weeks and months.

The new language does not guarantee the Fed will hold rates steady at its next policy meeting in June, and the statement noted that “inflation remains elevated,” and job gains are still “running at a robust pace.”

But the Fed‘s policy rate is now roughly the same as it was on the eve of a destabilizing financial crisis 16 years ago, and is at the level which a majority of Fed officials projected in March would in fact be “sufficiently restrictive” to return inflation to target. It is currently still more than twice that level.

Economic growth remains modest, but “recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation,” the Fed said.

Risks around the recent failures of several U.S. banks and a debt limit standoff between Republicans in Congress and Democratic President Joe Biden have added to the Fed‘s sense of caution about trying to tighten financial conditions further.

The shift was reflected in U.S. interest rate futures prices, which showed broad expectations for no hikes at either of the Fed‘s next two meetings.

U.S. stocks held on to modest gains, while yields on Treasury securities remained lower on the session. The dollar weakened against a basket of trading partner currencies.

COMMENTS:

BRIAN COULTON, CHIEF ECONOMIST, FITCH RATINGS, LONDON

“The Fed is no longer flagging that further hikes should clearly be expected but this falls short of a strong commitment to ‘pause’ on rate hikes. They are still talking about how they will determine the ‘extent’ of additional policy firming – not whether additional tightening is needed or not. The ongoing tightening of credit conditions is recognized but they have still raised rates today and have left the window open for future hikes. Inflation is still their main concern and they will not have been encouraged by recent wage developments.”

TOM GARRETSON, STRATEGIST, RBC PORTFOLIO ADVISORY GROUP, MINNEAPOLIS, MINNESOTA

“It was a pretty dovish rate hike today. The expectations were that it might be a bit more of a hawkish rate hike in terms of leaving the door open to further hikes if needed. The updated language in the policy statement does suggest the bar is going to be quite high for further rate hikes. The statement is pretty clear that today’s hike is probably the last. Treasury yields have fallen and the dollar has weakened so it’s a pretty dovish market reaction.”

MICHAEL JAMES, MANAGING DIRECTOR OF EQUITY TRADING, WEDBUSH SECURITIES, LOS ANGELES

“The headlines were pretty much what people were expecting, but there’s a little twist in terms of what is going to cause the Fed to pause. So I don’t think it’s as clear cut as 25 basis point hike and no further hikes or a pause in the short term. I think it’s going be more important than the headlines to listen to the commentary and explanations from Chair Powell when his press conference starts. I don’t think the headlines themselves about the Fed‘s decision were as clear-cut as maybe some were hoping to see. There still needs to be some color around the Fed‘s short-term intentions for rates.”

SAM STOVALL, CHIEF INVESTMENT STRATEGIST, CFRA RESEARCH, NEW YORK.

“For me the key was a change of a single word, saying that they believe that they will be determining whether future raises are necessary, whereas last time they said that they are anticipating that further rate hikes will be necessary. With the word ‘determining’ in place of ‘anticipating’ is essentially telling the markets that the Fed is now on pause.”

Copyright 2023 Thomson/Reuters

DONATE NOW