At the conclusion of yesterday’s FOMC meeting, another 25bp rate hike was announced, raising the Fed Funds rate’s target range to 4.75 – 5.00%. Let’s dig into the statement, the SEP, and the press conference to see what more we can glean from today’s announcement.
The Statement
- The statement contained reassurance about the U.S. banking system, stating that it is both “sound and resilient.”
- It also amended the phrase “ongoing increases to the target range may be appropriate” to “some additional policy firming may be appropriate,” which was a nod to potential tighter financial conditions for households and businesses as a result of the events of the last 2 weeks. The Fed believes that tighter financial conditions will have an effect similar to a rate hike, but they won’t know the extent of that effect for some time. Thus, the new phrase provides some flexibility in terms of the number of additional hikes that are necessary.
The SEP
- The median dot (median expectation) for Fed Funds at year-end 2023 remained at 5.1%, while the median dot for 2024 was revised upwards from 4.1 to 4.3%. (So not much change from what was projected in December, except for holding rates higher for longer and having fewer cuts in 2024.)
- Real GDP growth projections were revised down from 0.5% in 2023 to 0.4%, and in 2024 from 1.6% to 1.2%.
- Unemployment was revised lower in 2023 by 0.1%.
- Core PCE Inflation was revised higher both in 2023 and 2024.
Here’s a look at the specific projections, with year-on-year amendments highlighted in yellow:
The Press Conference:
One of Fed Chair Powell’s first questions was about SVB and reassuring the market that financial sector stress had been contained. When he answered, he responded that the banking system is safe and all depositors are safe. But there may not be as much certainty in this as he indicated. Earlier in the week, it was reported that the Treasury Secretary was considering an expansion of FDIC insurance. During the FOMC press conference, she made the statement that they are explicitly “NOT considering a broad increase in deposit insurance” at this time.
The Treasury market appeared to react more significantly to this statement than to anything Jerome Powell said during the press conference itself, with yields on the front end of the curve down 23bp and the 10-year down in yield around 13bp.
Powell also stated that part of the difficulty with the bank run at SVB was the speed at which it occurred due to the interconnected nature of their depositor base, and that they are looking at potential policies to implement to combat such issues in the future.
Importantly, he stressed that FOMC participants do not see rate cuts at all in 2023, contrary to the market’s current projections. The Fed Funds Futures market is still pricing in 2 25bp rate cuts later in the year.
Following the Fed statement and press conference, the 10-year US-Treasury yield ticked lower and equities have moved lower heading into the market close.
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