Federal Reserve Hikes the Fed Funds Rate by 25 bps
A highly anticipated Federal Open Market Committee (FOMC) meeting concluded on Wednesday, and monetary policy officials at the Federal Reserve elected to increase the target range for the federal funds rate by 25 bps to 4.75%-5.00%. In addition, the FOMC reaffirmed the current pace of quantitative tightening. Since September, the central bank has allowed up to $60 billion of Treasury securities and $35 billion of mortgage-backed securities to runoff its balance sheet each month.
The FOMC continued to characterize the current state of the economy in favorable terms. The meeting statement noted that "recent indicators point to modest growth in spending and production," and that job gains "are running at a robust pace." According to the FOMC, "inflation remains elevated." Indeed, the core CPI has risen 5.5% over the past year and at a 5.2% annualized pace over the past three months. A very tight labor market and elevated inflation argue for continued monetary policy tightening, but the Committee also noted the strains that have appeared in the banking system recently. In the FOMC's view, these strains "are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring and inflation," although "the extent of these effects is uncertain."
Given the uncertain outlook, Federal Reserve officials made relatively small changes to their projections for the economy and the federal funds rate. The median projection for real GDP growth this year was 0.4%, more or less unchanged from their previous projection of 0.5%. Similarly, the median projections for headline and core inflation in 2023 rose by just 0.2 and 0.1 percentage points, respectively. In the post-meeting press conference, Chair Powell argued that although the recent data have shown faster economic growth and inflation than was previously anticipated, the recent financial system stresses have created additional downside risks to future economic growth and inflation.
Accordingly, the FOMC backed off somewhat on its forward guidance regarding further tightening. Previously, the meeting statement said that "ongoing increases (emphasis ours) in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time." The FOMC now judges that "some additional policy firming may be appropriate." The dot plot, which shows each FOMC participant's projection for the year-end federal funds rate over the next few years, had a median projection for 2023 of 5.00%-5.25%. This was unchanged from the previous update in December 2022. If realized, this would imply just one more 25 bps rate hike this year, followed by a long hold and eventual rate cuts in 2024. For further reading on our outlook for U.S. monetary policy.
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