Fed raises interest rates by 25bp, stating we are close to the peak
The Federal Reserve has hiked the fed funds target rate range 25bp to 4.75-5% as largely expected by the markets and economists. This was a unanimous decision with the committee backing the view that “some additional policy firming may be appropriate„.
This is a slight language shift having previously said that “ongoing increases in the target range will be appropriate”.
Their dot plot chart shows that their end-2023 Fed funds median forecast is 5.1%, which is the same as it was in December, whereas surveys of economists suggested an expectation they would have raised that to 5.4%. So again it does appear to be a little more dovish than expected.
Nonetheless, the Fed appears quietly confident the economy won’t be heavily disrupted by recent banking sector woes. It argues that the “US banking system is sound and resilient” so their fourth quarter year-on-year GDP forecast for 2023 has only been cut from 0.5% to 0.4% while 2024 is now 1.2% versus 1.6% expected three months ago.
The unemployment and inflation expectations are little changed. Moreover, the Fed are now looking for only 75bp of rate cuts in 2024 rather than 100bp of cuts that it had projected back in December.
Chair Powell used the press conference to separate the Fed’s price stabilty role and financial stability role, saying that it has the tools to deal with both, echoing comments from the ECB’s Christine Lagarde last week.
Rate cuts in the second half 2023 remains on the list
Just over two weeks ago the expectation was that the Fed could be looking to get the Fed funds rate up to 5.5-5.75%, with some commentators talking about 6%.
Markets are now barely pricing one further rate rise (around 15bp at the May meeting currently) and are looking for cuts later this year (somewhere between 50bp and 75bp from the peak).
″We agree that we could get one final 25bp hike in May, leaving the Fed funds range at 5-5.25%. But higher borrowing costs and reduced access to credit mean a greater chance of a hard landing for the economy.
Rate cuts, which we have long predicted, are likely to be the key theme for the second half of 2023 and we are favouring 75bp of easing in the fourth quarter of this year.
It is important to remember the Fed never leaves it long between hiking and cutting rates. Historically it has been just six months between the last hike and the first rate cut″, says James Knightley Chief International Economist, ING Bank.
Article based on a story from ING Bank as copyright owner