Fed Raises Rates 0.25%
The Fed raised rates 0.25% at today’s FOMC meeting, bringing the target range for the fed funds rate to 4.75% – 5.00%. This was broadly in-line with expectations (the market had priced an ~85% chance of a rate hike immediately ahead of the meeting). The Fed also reiterated a continuation of its quantitative tightening (QT) program via reducing its holdings of Treasuries and Agency securities. The vote was unanimous.
The accompanying statement noted “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.” This was softened from language used in the prior statement, which stated “ongoing” tightening would be appropriate. The statement also addressed the soundness and resilience of the banking system, though noted that tighter credit conditions are likely to weigh on economic growth, the labor market and inflation.
Stocks initially bounced after the announcement and statement release, but pared gains following Fed Chair Powell’s press conference, and ended the day lower with the S&P 500 down -1.65%. Bond yields moved lower (bond prices higher) through the course of the day, with the benchmark 10-year Treasury currently trading at 3.44% and down from where it started the day at 3.60%.
For perspective and as it pertains to the current banking uncertainty: the S&P 500 is currently marginally higher than where it traded immediately before the Silicon Valley Bank collapse. Stock weakness has largely been isolated to the banking sector, indicating the market believes this is not a systemically important event for the broad economy. This is in stark contrast to 2008, where we witnessed broad-based weakness.
Pushes Back Against Rate Cuts
The Fed’s economic projection materials (aka “dot plot” forecasts) indicate a marginal reduction in economic growth expectations for 2023, relative to the prior projections made in December. The Fed slightly increased its inflation expectations and slightly reduced its expectation for the unemployment rate. The year-end fed funds rate projection was unchanged at 5.1%, indicating one more 0.25% rate hike this year, and no rate cuts are expected until at least 2024. A point Fed Chair Powell reiterated at the subsequent press conference.
