WASHINGTON – The Federal Reserve implemented a quarter-percentage-point interest rate hike on Wednesday, 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 fell during Fed Chairman Jerome Powell’s news conference. While he was qualified to say the inflation battle was far from over, some took Powell’s comments to mean the Fed may be nearing the end of its rate-hike cycle.
“The process to bring inflation back down to 2% has a long way to go and is likely to be bumpy,” the central bank chief told his post-meeting news conference.
However, Powell acknowledged that events in the banking system are resulting in tight credit conditions.
The softer tone in the central bank’s prepared statement came 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.”
During the press conference, Powell said the FOMC considered pausing rate hikes in light of the banking crisis, but ultimately agreed to a unanimous decision to raise rates due to interim data on inflation and the strength of the labor market.
“We are committed to restoring price stability, and the public has confidence that we will do so, and all evidence suggests that it will reduce inflation to 2% over time. It is important to uphold that confidence in our actions. Our words,” Powell said.
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.
Forecasts come against a volatile backdrop.
Despite the banking turmoil and volatile expectations surrounding monetary policy, markets held their ground. The Dow Jones Industrial Average Up about 2% over the past week, although the 10-year Treasury yield rose 20 basis points, or 0.2 percentage points, over the same period.
Although data for late 2022 have pointed to some softening in inflation, recent reports have been less 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 closings and capital problems of Silicon Valley Bank and Signature Bank Swiss debt And First RepublicThey have raised concerns about the state of the industry.
While big banks are considered well-capitalized, smaller firms face a liquidity crunch due to rapidly rising interest rates, as otherwise safe long-term investments 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.