As widely expected, the Fed raised rates by 25 basis points.
It clearly shows that it is starting an ongoing hiking cycle. They also said the shrinking of the balance sheet would begin at the upcoming meeting. The uncertainty created by the Russian invasion of Ukraine was acknowledged, but the FOMC acknowledged that it would increase price pressures in the first place, while also undermining economic growth. There is an objection. A prominent hawk, St. Louis Fed President Bullard favored a 50 basis point cut in interest rates.
However, the hawkish implications of the Fed’s move are clear.
The new forecast points to a further 150 basis points of tightening this year, with the final rate rising to 2.8% from 2.1% in December. This is higher than the so-called long-term equilibrium rate, which actually slipped from 2.5% to 2.4%. However, it is expected to peak next year. Previously, it had a final rate of 2024. Forecasts by seven officials suggest a change of at least 50 basis points is appropriate.
Growth forecasts for this year were downgraded to a median forecast of 2.8%, down from 4.0% in December.
The median forecast for 2023 and 2024 remains unchanged at 2.2% and 2.0%, respectively. Chairman Powell played down the risk of a recession, pointing to a strong labor market and strong corporate and household balance sheets. Powell defended the above-trend (about 1.75%) median GDP forecast of 2.8%.
Predictions are made.
The median now sees the Fed’s target deflator at 4.3% this year, up from 2.6% in December. By 2023, the PCE deflator is projected to be 2.7% instead of 2.3%, and by 2024, the median forecast is 2.3% instead of 2.1%.
Markets responded to the hawkish message.
and up (bearish curve flattening) and stocks down. The opening gap caused by the sharply raised opening is filled. The dollar reached and rose to fresh session highs against several other major currencies before stabilizing. It rose from around 1.86% to 2.24% before stabilizing. From about 1.87% to nearly 2.0%.