Federal Reserve hikes by another 25 basis points, as expected, softens guidance

Petr Vdovkin

The Federal Reserve on Wednesday pushed its policy rate up another 25 basis points to 5.00%-5.25%, as expected, in its mission to drive down inflation even as recent bank failures roiled markets.

The central bank's monetary policy committee said it will closely monitor incoming information and assess its implications to determine "the extent to which additional policy firming may be appropriate to return inflation to 2 percent over time." The statement softened from its March statement that had expected additional firming, indicating that the Fed may pause rate hikes at its June meeting.

In 10 meetings over the course of 15 months, the Federal Open Market Committee has raised the federal funds rate target range by 525 basis points, from near zero an the onset of March 2022.

"The Fed has hiked to the 5.1% target from SEP (summary of economic projections), which implies the pause by default," said SA contributor Damir Tokic. "From this point on, monetary policy will be strictly data dependent. Given that core CPI inflation is predicted to be well above 5% over the next 2 months, it is likely that additional hikes are coming, in June and possibly in July."

All three of the major U.S. stock averages perked up after the statement. The Nasdaq rose 0.4% in Wednesday midafternoon trading, the S&P 500 gained 0.2%, and the Dow, erasing earlier losses, was barely in the green. The 10-year Treasury yield fell 4 basis points to 3.39%.

The central bank noted that economic activity expanded at a "modest pace" in Q1, job gains have been robust in recent months, and the unemployment rate remains low. Still, inflation remains elevated.

Traders are expecting a pause at the June meeting, with a 72.1% probability the fed funds rate will stay at 5.0%-5.25%, up from a 63.8% probability a week ago, according to the CME FedWatch tool.

The policymakers also referred to the recent bank turmoil. "The U.S. banking system is sound and resilient. Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation," it said in its statement. "The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks."

The FOMC voting members voted unanimously for the 25-bp rate hike.

The Fed has left the window open for further rate hikes, said Fitch's chief economist, Brian Coulton. "The Fed is no longer flagging that further hikes should clearly be expected but this falls short of a strong commitment to ‘pause’ on rate hikes," he said.

"In pushing the benchmark Fed funds rate above 5% for the first time since 2007, the Federal Reserve is underscoring their commitment to getting inflation under control and restoring price stability," said Bankrate Chief Financial Analyst Greg McBride. However, "in true central bank fashion, the Fed left themselves a path to pause, or to hike rated further if necessary."

Fed Chair Jerome Powell will discuss the monetary policy decision at his 2:30 PM ET press conference.

On Monday, SA contributor Logan Kane said he expects the Fed to hike again in June after May's expected increase. And last week contributor John M. Mason discussed how the Fed is back on track in its QT program.

More on the Fed hiking cycle

• Portfolio Strategy After Fed Hikes Rates, Continues Quantitative Tightening, No Rate Cuts Ahead
• The Federal Reserve Continues To Put Inflation First
• Powell Leans The Wrong Way Ahead Of Next Week's CPI
• The Fed's May Rate Hike Will Likely Not Be Its Last

Comments

[veebee13]

Stop calling it Federal, there is nothing federal about private banks shafting poor and middle class people in USA.

[rbrucer]

Get the Fed back to a stable currency mission only, and cut their budget by 3/4. And btw, pushback on any move to eliminate the $US dollar and replace it with a government-controlled cryptocurrency.

[karondongotbanned]

great buying opportunity today, dont miss out. we still have another 20-30% up this year. yesterday was a great opportunity to buy but today is also. inflation is here to stay, which makes stock go up. its impossible for nasdaq to drop below 11000 again

[Steve Kean]

The European Central Bank also hiked by 25 basis points today. That comes after the Fed yesterday, and the surprise hike in Australia earlier this week.

Anyone still believing we are headed for rate cuts in 2023??

Those money market funds yielding 5% look pretty good to me…

[Elon beat me with jumper cables]

Prices were coming down in grocery stores, supply chain issues were being resolved (like F running out of right hand door handles for the F-150 and F-150 EV). They just replaced them with temporary ones and they will install the doorhandles and ship out to customers ASAP.

All they had to do was a hawkish pause. You can't raise rates from 0% to 5.25% the fastest in history. The financial system can't handle that stress. They could have gone to 7% over a slower time frame and the economy wouldn't break. I may be younger but I know the Fed didn't lower/raise rates every quarter it was every other quarter. Nor did they have these stupid press conferences where we see that CHAT-GPT4 could do a better job answering questions the J Powell.

I am definitely glad I invested in Europe at the end of the year through IEUR and have 25% in $TLTW. iShares ETF that sells calls on its own ETF. Up 9.1% on the year with dividends.

[Dale Roberts]

"The banking system is sound."

[Phil Dumfee]

@Dale Roberts sounds like a train wreck

[mizesa]

@Dale Roberts He is going to regret saying that. PACW dropped 50% after that statement.

[PanicFirst]

@mizesa All these west coast banks... Wonder why?

[AlphaMove]

I would not blame the fed for all this mess. Investors and the people should blame only themselves because you voted for politicians, who have been printing trillions in free money to you.
The more money sloshing in the system, the higher interest rates have to be.
You wouldn’t have voted for anyone who is fiscally responsible and had plans to stop the irrational government spending and give-aways. So stop complaining and live with it.

[Phil Dumfee]

@AlphaMove The Fed is to blame. Too far. Too fast. Inflation was transitory. Over reaction. They should all be fired and put in jail for causing financial distress and mayhem across the globe.

[Bg1991]

@AlphaMove absolutely! We can’t print $4.3 T in a panic while ordering 30% of the workforce at home and expect anything but rampant inflation.

[Bg1991]

@Phil Dumfee transient imply prices will return to normal. MI rarely paid over $300/week for groceries. Now it’s $400-$500 weekly, my airfares have doubled. Still waiting for the roses to stop.

[Robert S Dot]

they consolidate the banks thereby reducing the money supply.

[klm123]

And the 10-yr rate goes down.... Market living in fantasy world.

[Growth-it-UP]

Bring on a few more.

[Thunderdemon]

So many gullible bears on this thread. Do you really think the fed are going to broadcast a possible pause/pivot? You honestly think they will say ‘this is the last one, promise.’ Of course not. Even if the fed plan to pause or pivot anytime soon they will leave things deliberately vague and obfuscate till the last possible minute.

The market will obviously try to front run this as it is naturally forward looking - but the market is more likely to be right than a bunch of bears who still blindly believe the fed.

[mizesa]

@Thunderdemon Look at the huge gains made last year shorting ARKK and this year shorting KRE. Believing the Fed has been extremely profitable!

[yieldhunter196]

@Thunderdemon this. Too many trolls in here

[SuperPac]

Reported - PacWest exploring potential sale....LOL
This baby is gone by the weekend...
Who's next

[Illuminati Investments]

@SuperPac $WAL, apparently.

[karondongotbanned]

looks like we will hit another all time high soon. start buying! once in a life time opportunity

[Winnertakesall]

Banks will stop lending... guess what comes next, Business fail and quick. We're already deep in a depression IMHO.

[ex institutional listed derivatives analyst]

The Folks at the Fed don't know that optics matter. When businesses lose confidence in a bank it's game over. Banks will put credit and this results in immediate bankruptcy. Congrats Fed, you got what you wished for...

[wboz]

No cuts until something breaks. Why would they? They've reloaded their ammo, why fire it all away immediately ...

[Illuminati Investments]

@wboz Um, $PACW and $WAL are breaking AH.

[wboz]

@Illuminati Investments indeed

[Mo007]

Half of our banks are insolvent. Credit crunch will continue and I wouldn’t be surprised if another banks fails this month. The next FOMC meeting feels like it’s months away… that’s very bad for the markets and banks.

[Bg1991]

@Mo007 When banks are in trouble they raise interest rates and criteria. Very little evidence of this to date beyond pricing to much barrowing costs.

[lapas]

Another 25 in June....

[SuperPac]

After the Powell speech, the bottom dropped again.
PacWest down 3%
West All down 4%
Zion down 6%

Easy capital / liquidity days are over for good. Ain't coming back in any hurry. Look after your money.

[kata]

@SuperPac

I'm convinced, Powells a fool.

[Mo007]

@SuperPac PacWest is down 23% after trading as of this post. It will be a interesting day for them tomorrow.

[SuperPac]

@Mo007
To the slaughter-bench.

[Amos Tuck]

1. Raised rates.
2. Decision was unanimous.
3. Might raise rates again.
4. No rate cuts this year.
5. Will not relent until inflation hits 2%.

Stocks are dangerously expensive.

Investors need to de-risk...quickly.

[Wellington999]

@Amos Tuck Cali...housing prices up, multiple bids, more traffic than ever with gas at $4.75, long lines at restaurants and burger drive thrus, very very far from a recession

[Elon beat me with jumper cables]

@Amos Tuck AAPL dropping in AH. There are no more buyers unless they pull a rabbit out of a hat. AAPL now makes up 6% of the S&P500 or something. I’m already 25% in treasuries and I plan to increase that ammount.

[superartus]

@Wellington999 we're back to bidding wars on homes again in SoCal. Like you said restaurants are packed. Everyone has so much money here.