MNI: Fed Raises Rates 25BPS, Flags More Hikes
The Federal Reserve boosted interest rates by a quarter percentage point Wednesday as many investors expected and said more increases are likely, but the FOMC also indicated it is watching for signs the recent banking crisis will tighten credit conditions.
The Fed raised the federal funds rate target range to 4.75% to 5%, the highest since 2007, but indicated future hikes might depend on the effects of the recent financial turmoil on the economic outlook.
"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 in its statement. "The extent of these effects is uncertain."
“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% over time.”
Rattled markets went into this month’s meeting expecting the Fed to hike just once more and reverse course by mid-year. In their latest economic projections, officials forecast a peak fed funds rate of 5.1%, unchanged from their December forecast. They also offered no hint of easing policy this year.
Policymakers still signaled ongoing worries about inflation, which the committee says “remains elevated.” The Fed’s preferred PCE inflation measure was 5.4% in the year to January, down from 40-year highs last summer but still far above the central bank’s 2% target.
Fed Chair Jerome Powell is set to face questions from reporters starting at 2:30 pm ET, including about how much the Fed can separate financial stability policy from monetary policy and about regulatory shortcomings at the Fed, which supervised the failed Silicon Valley Bank.
Expectations for future Fed tightening have swung wildly in the past two weeks along with hyper volatile financial markets, which have been reacting to a banking crisis in the United States and the fallout from problems at Credit Suisse.
Earlier this month, Fed Chair Powell had indicated the FOMC could speed up the pace of hikes to 50 basis points at today’s meeting. Expectations for the peak of fed funds rose close to 6% in early March and have since cratered alongside two-year note yields.
The outlook has deteriorated rapidly as bank runs that required extraordinary measures from the Fed and other regulators have raised fears of a credit crunch.