The Federal Reserve on Wednesday enacted a quarter-percent interest rate hike, expressing alarm over the recent banking crisis and signaling an end to the hikes.
With its ninth hike since March 2022, the rate-setting Federal Open Market Committee noted that future increases are not guaranteed and will depend on incoming data.
“The committee will closely monitor incoming data and assess the implications for monetary policy,” the FOMC’s post-meeting statement said. “The Committee expects that some additional policy stabilization will be appropriate to achieve a stance of monetary policy that is sufficiently accommodative to return inflation to 2 percent over time.”
Those words were a departure from earlier statements that “ongoing increases” would be appropriate to reduce inflation. Stocks rose slightly after the announcement as investors waited to hear more from Chairman Jerome Powell at a press conference at 2:30 pm ET.
“Markets are responding well to an expected 25 basis point rate hike, along with reports that the banking system remains strong,” said Quincy Krosby, chief global strategist at LPL Financial. “Of course, the press conference will be more in-depth as reporters seek to gauge the Fed’s path forward, as the futures market sees another 25 basis point hike in May and the start of rate cuts in the summer.”
The softer tone comes amid a banking crisis that has raised concerns about the stability of the system. The report noted the potential impact of recent events.
“The U.S. banking system is sound and resilient,” the panel said. “Recent developments are likely to tighten credit conditions for households and businesses, weighing on economic activity, hiring and inflation. The magnitude of these effects is uncertain. The team remains highly focused on inflation risks.”
Despite warnings about possible fallout from the banking crisis, the committee unanimously approved the rate hike.
The increase brings the benchmark federal funds rate to a target range of between 4.75%-5%. The rate sets what banks charge each other for overnight lending, but also feeds into many consumer loans, such as mortgages, auto loans and credit cards.
Projections released with the rate decision point to a top rate of 5.1%, unchanged from the last estimate in December, and indicate that most officials expect just one more rate hike.
In data released with the report, seven of the 18 central bank officials who submitted estimates for the “dot plot” see the 5.1% higher than the “terminal rate.”
The next two years’ worth of projections also showed considerable disagreement among members, reflected in a wide spread among the “points.” However, the median of estimates points to a 0.8 percentage point reduction in 2024 and 1.2 percentage point reductions in 2025.
The report removed all references to the impact of Russia’s invasion of Ukraine.
Markets are closely watching the decision, which comes with a higher degree of uncertainty than usual for central bank moves.
Earlier this month, Powell signaled that the Fed would need to take a more aggressive path to control inflation. But the fast-moving banking crisis overruled any notion of a more drastic move — and contributed to general market sentiment that the central bank would cut rates before the end of the year.
The estimates released Wednesday by Federal Open Market Committee members looking at rates, inflation, unemployment and gross domestic product underscored the uncertainty of the policy path.
Officials also adjusted their economic forecasts. They raised expectations for inflation slightly, from 3.1% in December, to 3.3% this year. Unemployment was cut to 4.5%, and the outlook for GDP fell to 0.4%.
Estimates for the next two years are little changed, except for GDP slowing to 1.2% in 2024 from 1.6% in December.
The predictions come against a turbulent backdrop.
Despite the banking turmoil and volatile expectations surrounding monetary policy, markets held their ground. The Dow Jones industrial average rose 2% last week, although the 10-year Treasury yield rose 20 basis points, or 0.2 percentage points, over the same period.
Although data released late in 2022 indicated some moderation in inflation, recent reports have not been encouraging.
The personal consumption expenditure price index, the central bank’s preferred measure of inflation, rose 0.6% in January and was up 5.4% from a year ago – 4.7% when food and energy are removed. That’s well above the central bank’s 2% target, and the data prompted Powell on March 7 to warn that interest rates could rise more than expected.
But banking problems have complicated the calculus of decision-making, as the central bank’s tightening pace has contributed to liquidity problems.
The closures of Silicon Valley Bank and Signature Bank, as well as capital problems at Credit Suisse and First Republic, have raised concerns about the state of the industry.
While big banks are considered well-capitalized, smaller firms face a liquidity crunch as rapidly rising interest rates cause otherwise safe long-term investments to lose value. For example, Silicon Valley had to sell bonds at a loss, triggering a crisis of confidence.
The central bank and other regulators took emergency measures that appear to have staved off immediate financial concerns, but concerns remain among regional banks about how deep the damage is.
At the same time, recession worries persist as rate hikes work their way through the economic plumbing.
An indicator produced by the New York Fed using the spread between 3-month and 10-year Treasuries showed a 55% chance of contraction over the next 12 months at the end of February. Since then the yield curve has inverted.
However, the Atlanta Fed’s GDP tracker shows first-quarter growth at 3.2%. Consumers continue to spend — credit card use is on the rise — and unemployment is at 3.6%, while wage growth remains brisk.
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