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Fed Hikes Interest Rates to 4.75-5%, Powell Softens Message

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In the latest statement from the Federal Open Market Committee (FOMC), interest rates are being raised again, by 25 basis points (bps), to a Fed funds range of 4.75%-5.00%. This brings the high end of this range to the loftiest interest rate level in a decade and a half. It also amounts to “the other shoe dropping,” as this raise was largely expected, even going back to the Fed’s dot-plot laid out in late 2022.

Markets bounced higher immediately after the announcement, though as Fed Chair Jerome Powell’s press conference progressed, we began ticking down on the Dow, S&P 500 and Nasdaq. The Fed’s language in its statement grew notably milder from the last meeting, even as it clearly states once again that inflation is “elevated.” But it used to say, “…Ongoing increases [to interest rates] will be appropriate…” and now it says, “Some additional policy firming may be appropriate…” This is big: the Fed is saying we’re (almost) at the end of the line for interest rate hikes.

Also, this statement has such a dovish touch, it doesn’t even want to say “rate hike,” and instead opts for the slightly more vague “firming.” (Powell cleared up that the two are very much the same thing in the Q&A that followed.) The forward outlook, based on a median survey of FOMC members, expects only one more +25 bps hike throughout the rest of 2023 (+5.1%), -75 bps in decreases by the end of 2024 (+4.3%) and -125 bps in drops by 2025’s end (+3.1%).

Thus, there is no baseline for any interest rate cuts this year. And market participants have now taken offense. Market indices dove from triple digits in the green upon the release to triple-digits in the red prior to Powell stepping down from the podium. Of course, it’s quite possible a +5.1% Fed funds rate by the end of this December is reached by rate hikes AND cuts: if inflationary conditions persist into the late spring/summer and the Fed continues to hike 25 bps per meeting, and then we see accelerating coolness in the economy as a result, the Fed could instate a pivot faster.

And all of this is, of course, subject to change. There is no special window into the problems at regional banks the Fed has that the rest of us do not. The Fed does understand the issues in the current banking system will continue to bring about tighter credit conditions, and there is plenty of data making direct correlations between credit tightening and cooling inflation. Powell explained that for the FOMC they will stress the importance of “being alert as we go forward.”

So the policing of inflation will continue, but the rate increases may not. This is as about as reasonable a message as we could expect right now. Without more clarity on financial contagion from the troubled banks, the Fed needs to stay flexible at this point. And if the next six weeks of economic and earnings data (the next FOMC meeting is on May 2nd and 3rd) brings about much lower PCE, CPI and jobs numbers, then that would at very least keep the Fed from rising from here — which would cap this at nine-straight rate hikes, 475 bps worth. Not insignificant, but certainly not infinite.

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