The Fed passed the quarter-point rate hike law, expressing caution over the recent banking crisis and noting that rate hikes are coming to an end.
Alongside the ninth hike since March 2022, the rate-setting Federal Open Market Committee (FOMC) noted that future increases are not certain and will largely depend on incoming data. In a statement made by the FOMC after the meeting,
“The committee will closely monitor incoming information and evaluate its impact on monetary policy,” he said. “The committee estimates that some additional policy tightening may be appropriate to achieve a sufficiently restrictive monetary policy stance to return inflation to 2 percent over time.”
This statement was different from the previous statements, which stated that “increases continue” in order to reduce inflation.
POWELL’S EXPLANATION WAS IMPORTANT
Fed Chairman Jerome Powell’s statements at a press conference mean that the central bank is approaching the end of its rate hike cycle, and that the fight against inflation is not over.
“The process of lowering inflation to 2 percent has a long way to go and is likely to be bumpy,” said Powell, acknowledging that recent events in the banking system will likely lead to tighter credit conditions, thus softening the central bank’s tone.
At the press conference, Powell said that “rate cuts are not in our baseline scenario” for the remainder of 2023, even though market prices are in the opposite direction.
Powell said the FOMC was considering a pause in rate hikes in light of the banking crisis, but ultimately unanimously approved its decision to raise interest rates amid interim data on inflation and labor market strength.
“We are committed to restoring price stability, and all evidence says the public trusts we will do so in a way that will bring inflation down to 2 percent over time. “It’s important that we maintain that trust with our words as well as our actions,” Powell said.
Stocks on the American stock market initially rose after the Fed’s decision, but fell after Powell’s statements.
WHAT DID IT SAY IN THE FED EXPLANATION TEXT?
“The US banking system is robust and resilient,” the committee said in its prepared statement. “Recent developments are likely to result in tighter credit conditions for households and businesses and put pressure on economic activity, hiring and inflation. The extent of these effects is uncertain. The Committee continues to be extremely attentive to inflation risks.”
Estimates published with the rate decision point to a peak rate of 5.1 percent, unlike the last forecast in December.
Data released alongside the statement show that seven of the 18 Fed officials who provided estimates for the “dot plot” saw rates higher than the “terminal rate” of 5.1 percent.
Forecasts for the next two years also showed considerable disagreement among members, which was reflected in a wide distribution between “dots”. Still, the median of estimates points to a 0.8 percent reduction in rates in 2024 and a 1.2 percent reduction in 2025.
Officials also changed their economic forecasts. They slightly increased their inflation expectations, with a fixed rate of 3.3 percent for this year compared to 3.1 percent in December. Unemployment was reduced to 4.5 percent, while the growth outlook was reduced to 0.4 percent.
Forecasts for the next two years have changed little, except that the growth forecast for 2024 has dropped to 1.2 percent from 1.6 percent in December.
PASSWORDS OF THE EXPLANATION
The Fed’s statement yesterday was compared with the statement released after the previous policy-making meeting on February 1.
Notable changes include a shift from “continuing increases” to policy rate “some additional tightening” and a statement that “the US banking system is robust and resilient.”
The text removed from the February description is red with a horizontal line running through it.
The text that appears for the first time in the new expression is red and underlined.
Both expressions show black text.
Source: CNBC