CNBC reported that the Federal Reserve increased a quarter percentage point interest rate on Wednesday. It expressed caution about the ongoing banking crisis. Moreover, it indicated that interest rate hikes are nearing an end. Along with its 9th hike since March 2022, the Federal Open Market Committee pointed out that future increases are not assured and shall depend on incoming data.
Is it the end of the rate-hiking?
Federal Open Market Committee’s post-meeting statement said that the Committee shall monitor incoming information. They shall also assess the implications for monetary policy. The Committee further anticipated that some additional policy firming could be appropriate to get a stance of monetary policy that is restrictive to return inflation to 2 % over time.
Jerome Powell’s (Fed Chair) comments during a news conference that the central bank can be nearing the end of the rate-hiking cycle. He further said that the process to get the inflation back down to 2 percent has a long way to go. He also acknowledged that the recent turmoil and events in the banking system might result in tighter credit conditions.
As a result, the stock prices rose initially after the Fed’s decision but went down after Powell’s remarks.
The FOMC, or Federal Open Market Committee, said the U.S. banking system is resilient. However, the recent developments can result in tighter credit conditions for businesses and households. It can weigh on inflation, economic activity, and hiring.
In the news conference, Jerome Powell said that the Federal Open Market Committee (FOMC) considered stopping rate hikes due to the banking crisis. However, it unanimously approved the decision to raise rates. This was because of intermediate inflation data and the strength of the labor market.
The increase now takes the benchmark federal funds rate between 4.75 percent to 5 percent.
Projections that were released with the rate decision to a peak rate of 5.1 percent, which shall be unchanged from the last estimate in December. It indicates that a majority of officials now expect only one more rate hike ahead.
The next two years’ projections showed disagreement among members, which reflected a big dispersion in the graph. However, the estimates point to a 0.8 percent point reduction in rates in the year 2024 and a 1.2 percent point reduction in the year 2025.
The effect on the market
Markets were closely watching the decision. The decision brought a higher degree of uncertainty than it is for Fed moves.
Estimates were released on Wednesday, and Federal Open Market Committee members saw unemployment, rates, inflation, and gross domestic product that underscored the uncertainty for the policy path.
However, despite the banking turmoil and the volatile expectations around the monetary policy, the markets held their ground. Over the last week, the Dow Jones Industrial Average increased by about 2 percent. Also, the ten-year Treasury yield rose about 20 basis points, or 0.2 % points, in the same period.
What is the financial concern at present?
Closures of SVB or the Silicon Valley Bank, then the Signature Bank, and after that, the capital issues at Credit Suisse Bank and First Republic Bank raised concerns about the state of the finance industry.
The Fed and also the other regulators took action with emergency measures. Their financial emergency measures seemed to stem immediate funding concerns. But, worries are still present about the financial effects on regional banks. Again, the recession fears also persist because the rate increases usually work their way through economic plumbing.