- Federal Open Market Committee (FOMC) statement: This was far more hawkish than investor and market expectations. The Fed voted 8-1 to raise the target range for the fed funds rate by 25bp, to 0.25-0.50%, and signaled more rate hikes. St Louis Fed President James Bullard dissented, after voting for a 50bp rate hike.The Fed viewed the balance of risks to be skewed towards upward pressure on inflation over potential weaker economic activity. The Fed formally ended quantitative easing (QE) and signaled the beginning of a reduction in its holdings of Treasury securities, and agency debt and agency mortgage-backed securities (MBS) within the next coming meetings.
- Summary of Economic Projections (SEP): The projected path of fed funds rose higher and faster from the December SEP. The survey forecast the median fed funds rate rising 1.0% in 2022, 1.2% in 2023 and 0.7% in 2024, to 1.9%, 2.8% and 2.8%, respectively. On inflation, the Fed revised up its year-end 2022 core PCE forecast significantly, from 2.7% to 4.1%. The unemployment rate remained unchanged, at 3.5% for both 2022 and 2023. Overall, the SEP showed that Fed members are concerned about elevated risks of inflation and showed a willingness to act accordingly. Fed officials now expect the fed funds rate to rise above its long-run terminal rate.
- The key takeaway is the Fed wants to preserve its flexibility: Chair Jerome Powell restated that the Fed’s ‘Dot plot’ showed seven interest rate hikes this year (inclusive of the first 25bp hike) and expressed a willingness to adjust policy as needed in the future. He stated that the probability of recession is not elevated. On balance, he expects the US economy to continue to grow over the near term, even given less accommodative monetary policy.
- Market reaction and investment implications: There was a V-shaped reaction in financial markets. Initially, markets sold off in response to a hawkish FOMC statement. They then rallied by the end of Powell’s press conference. The US yield curve flattened. Equity markets closed stronger. In currency markets, the dollar followed a similar reaction to that of equity markets, with the currency rallying following the statement, then selling off after the conference. The short end of the US yield curve is more appropriately priced now that the market has discounted a more aggressive tightening cycle. The long end of the curve will potentially be influenced by geopolitics, growth prospects and inflation expectations. Should US inflation expectations become unanchored, the Fed has expressed a willingness to adjust policy more aggressively. For risky assets, the Fed’s general affirmation of market expectations will be supportive as near-term policy uncertainty recedes.
On 16 March, the Federal Reserve hiked the fed funds rate by 25bp, to 0.25-0.50%, the first rate hike in four years. The Fed decision was widely expected and probably the most telegraphed rate hike in recent memory. However, the meeting’s statement and accompanying SEP offered some hawkish surprises. The FOMC statement signaled that yesterday’s rate hike was the start of a series of rises in coming meetings, a clear departure from the gradual tightening cycle of 2015-18. While the Fed flagged concerns about the effects of the Russia-Ukraine war on the US economy, this was not sufficient to overcome their larger concern about inflation. Within the SEP, the median rate for the fed funds rate by year-end 2024 increased from 2.125% to 2.750%, well above the Fed’s estimate of the terminal rate (2.400%) and indicative of the Fed’s willingness to take the policy rate into “restrictive territory”. While investors initially reacted by selling Treasuries and equities and flattening the US yield curve, markets eventually retraced some of the initial sell-off, as Chair Powell’s press conference offered little additional insight with regard to the meeting statement and SEP.