Fed Rates Increase By A Quarter Percentage Point, Indicating An End To Increases

The Federal Reserve raised interest rates by a quarter percentage point on Wednesday, expressing concern about the current financial crisis and hinting that rate rises are coming to an end.

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Along with its ninth rate hike since March 2022, the Federal Open Market Committee warned that future hikes are not certain and will be primarily determined by incoming data.

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The FOMC's post-meeting statement stated, "The Committee will closely monitor new information and analyze the implications for monetary policy." "The Committee anticipates that some more policy firming may be necessary to achieve a monetary policy stance that is sufficiently restrictive to restore inflation to 2% over time."

This language differs from prior pronouncements, which emphasized that "ongoing increases" would be suitable to reduce inflation. At Fed Chair Jerome Powell's news conference, stocks plummeted. Others interpreted Powell's remarks to suggest that the central bank is nearing the conclusion of its rate-hiking cycle, but he tempered that by saying that the fight against inflation is far from done.

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"The path of reducing inflation back down to 2% has a long way to go and is likely to be rough," the central bank chief said at a news conference following the meeting.

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Powell did, however, agree that the developments in the financial sector were likely to tighten credit conditions.

"The financial system in the United States is solid and resilient," the committee stated. "Recent events are expected to tighten lending conditions for families and companies, putting a damper on economic activity, hiring, and inflation." The magnitude of these consequences is unknown. The Committee is nonetheless quite concerned about inflationary threats."

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Powell stated at the press conference that the FOMC considered a halt in rate rises in light of the financial crisis, but ultimately unanimously backed the decision to raise rates owing to intermediate data on inflation and labor market strength.

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"We are determined to restore price stability, and all data suggests that the public has trust in our capacity to do so, bringing inflation down to 2% over time." "It is critical that we demonstrate that confidence through our deeds as much as our words," Powell added.

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The hike brings the federal funds rate to a target range of 4.75%-5%. The rate determines what banks charge each other for overnight lending, but it also affects a wide range of consumer debt, including mortgages, auto loans, and credit cards.

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Projections provided alongside the rate decision show a peak rate of 5.1%, unchanged from the previous forecast in December and indicating that the majority of officials predict only one more rate rise.

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According to data disclosed alongside the announcement, seven of the 18 Fed members who made projections for the "dot plot" saw rates rising over the 5.1% "terminal rate."

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The forecasts for the following two years again revealed significant disagreement among members, as seen by a large dispersion among the "dots." Still, the median of the estimations leads to a 0.8 percentage point drop in rates in 2024 and a 1.2 percentage point reduction in rates in 2025.

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The statement made no mention of the consequences of Russia's invasion of Ukraine.

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Markets closely watched the decision, which came with a greater degree of uncertainty than is typical for Fed actions.

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Powell had suggested earlier this month that the central bank may need to take a more aggressive approach to tame inflation. The fast-moving banking crisis slowed any notion of a more hawkish move - and contributed to a general market perception that the Fed will cut rates by the end of the year.

Rates, inflation, unemployment, and gross domestic product were among the indicators released by the Federal Open Market Committee on Wednesday that underscored the uncertainty for policymakers.

Authorities also revised their economic forecasts. They raised their inflation forecast slightly, with a 3.3% rate expected this year, up from 3.1% in December. The unemployment rate was reduced to 4.5%, while the GDP forecast was reduced to 0.4%.

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The predictions for the following two years haven't altered much, except that the GDP projection for 2024 has been reduced to 1.2% from 1.6% in December.

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The projections are made against a tumultuous environment.

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Markets have kept their footing despite the banking upheaval and shifting expectations about monetary policy. The Dow Jones Industrial Average is a stock market index.

is up around 2% in the last week, while the 10-year Treasury yield is up approximately 20 basis points, or 0.2 percentage points, in the same time frame.

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While statistics from late-2022 indicated some decrease in inflation, recent figures have been less hopeful.

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The Fed's preferred inflation indicator, the personal consumption expenditures price index, climbed 0.6% in January and was up 5.4% year on year - 4.7% when food and energy were excluded.

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This is significantly beyond the central bank's 2% objective, prompting Powell to warn on March 7 that interest rates will likely rise more than expected.

Yet, banking troubles have complicated the decision-making equation, since the Fed's rate of tightening has led to liquidity challenges.

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Silicon Valley Bank and Signature Bank closures, as well as capital concerns at Credit Suisse

as well as the First Republic has expressed worry over the industry's status.

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While large banks are deemed well-capitalized, smaller institutions have encountered liquidity crises when interest rates have suddenly risen, causing otherwise secure long-term investments to lose value. Silicon Valley, for example, had to sell bonds at a loss, resulting in a confidence crisis.

The Fed and other authorities intervened with emergency steps that appear to have alleviated immediate financing issues, but questions remain about the extent of the damage among regional banks.

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At the same time, recession fears remain as the rate hikes make their way through the economic plumbing.

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As of the end of February, a New York Fed indicator based on the gap between 3-month and 10-year Treasurys indicated that the likelihood of a recession in the following 12 months was at 55%. Since then, the yield curve inversion has grown.

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The Atlanta Fed's GDP tracker, on the other hand, pegs first-quarter growth at 3.2%. Consumers continue to spend, albeit credit card usage is on the rise, and unemployment was 3.6%, despite rapid payroll growth.

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