March 22nd FOMC Follow-Up

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  • The FOMC voted to raise the Federal Funds target rate by 25 basis points to a range of 4.75 – 5.00%. This was a unanimous decision by the Committee and was consistent with market expectations heading into the two-day meeting after a volatile previous week.
  • This vote was considered one of the most uncertain in recent history with the onset of the banking crisis coinciding with the FOMC public blackout period which began March 10th, restricting potential guidance from Fed officials over the last 12 days. Fed Chair Powell had testified earlier this month that there would be debate over a 50 bps hike after strong February inflation and employment data but said in his press conference today that the committee did consider a pause following the banking system turmoil.
  • The FOMC statement dropped language used from the last eight meetings which said the committee anticipated ongoing increases in the target range, instead saying that “some additional policy firming may be appropriate” to reach the 2% inflation target.
  • Powell’s press conference reiterated language from the statement that “the U.S. banking system is sound and resilient.” Tighter credit conditions resulting from the pressure within the banking sector will likely impact both households and businesses. Powell said that such an environment works in the same direction as rate increases and that “you can think of it as being the equivalent of a rate hike or perhaps more than that.” However, he was emphatic that rate cuts later this year are not the baseline expectation for Fed officials.
  • A new dot plot was released showing the median rate estimate for year-end 2023 was unchanged from December at 5.1%. Seven of the 18 officials forecast a higher rate and only one official is lower than the median. The 2024 rate was increased to 4.3% from 4.1%while the 2025 and longer run rates of 3.1% and 2.5%, respectively, were unchanged.
  • Equity markets had been flat prior to the rate announcement. There was a sharp spike afterwards but then a swift retracement to end the day negative following the press conference. Treasury’s rallied, with yields declining at all durations longer than 6-months.

Economic Projections

  • The Fed’s Summary of Economic Projections was updated, showing that median GDP forecasts for 2023 declined by 0.1% to 0.4% and the forecast for 2024 declined by 0.4% to 1.2%. Both projections are well below the median longer run estimate of 1.8%.
  • Unemployment projections were fairly steady, decreasing by only 0.1% for 2023 to 4.5%. A longer run forecast of 4.0% was maintained.
  • 2023 PCE inflation estimates were increased from 3.1% to 3.3% but the officials continue to project a decline to 2.0% in the longer run.

The FOMC is next scheduled to meet March 21-22, 2023


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