Fed says 'some additional policy firming may be appropriate', hikes by 25bp
Policymakers at the Federal Reserve went ahead and hiked interest rates as expected.
The target range for the Fed funds rate was hiked by 25 basis points to 4.75-5.0% and the central bank's holdings of Treasury Securities, agency debt and agency mortgage-backed securities would continue to be shrunk as previously announced.
The Fed also said that "some additional policy firming" may be needed to return inflation to its 2% target.
In his post-meeting presser, Fed chief, Jerome Powell, said that it was not clear to what extent or for how ling credit conditions would be tightened by recent developments, adding that they would simply have to watch how that evolved, although "ultimately" enough would be done to lower inflation back to target.
Following its previous meeting, the central bank had said that ongoing hikes would be needed.
America's banking system remained "sound and resilient", although recent developments were expected to result in tighter credit conditions and drag on economic activity, hiring and inflation, the Federal Reserve said in its policy statement.
And while the extent of those effects was "uncertain", the Federal Open Market Committee remained "highly attentive" to inflation risks.
Indeed, job gains had picked up in recent months, unemployment was low and price pressures were elevated, the Fed pointed out.
Wednesday's decision was unanimous.
A fresh set of economic projections from the Fed's top officials published on Wednesday saw them reduce their so-called central tendency for GDP growth in 2023 reduced from 0.4-1.0% in December to 0.0-0.8%.
The central tendency for the headline rate of increase in the price deflator for personal consumption expenditures in 2023 however was raised from 2.9-3.5% to 3.0-3.8%.
Their projection for core PCE inflation was raised from 3.2-3.7% to 3.5-3.9%.
Forecasts for the Fed funds rate in 2023 were nudged up from 5-1-5.4% to 5.1-5.6%, although the median forecast was unchanged at 5.1% - implying one more 25bp hike.
In 2024, the central tendency of forecasts for the Fed funds rate was seen coming down to 3.9-5.1%, against a prior forecast for 3.9-4.9%.
Commenting on the latest FOMC decision, IG chief market analyst, Chris Beauchamp, said: "The dot-plot points towards a steady cut in rates in 2024, and it sends the message that Fed members take the risk of further stress in banks seriously.”
"[...] But all sides will need to be careful in case a potentially-cautious Powell is misinterpreted as a reason to turn pessimistic once again.”
"Despite recent strong economic data, officials acknowledged the likely hit from the banking sector turmoil and left their end-year projection for the fed funds rate unchanged at 5.1%, implying only one more 25bp hike from here," added Andrew Hunter, deputy chief US economist at Capital Economics.
"Nevertheless, with the crisis making us more confident that the economy will fall into recession soon, we suspect the Fed will be cutting rates again before long."
In an initial reaction, as of 1832 GMT, the yield on the benchmark 10-year US Treasury note was slipping by eight basis points to 3.541%.
The S&P 500 had flipped back into the green and was edging up by 0.22% or 8.87 points to 4,011.03.
Worth noting perhaps, in the background, the head of the US Treasury, Janet Yellen, reportedly said in Senate testimony that her department had not looked at expanding the Federal Deposit Insurance Corporation's deposit insurance programme.
"This not something we have looked at, it's not something that we're considering."
She added that during a contagious bank run, the Treasury would likely seek an exception that would allow such a move, but it would be done on a case-by-case basis.