Fed Moves to Hike Rates

The Federal Reserve -- as expected -- boosted the Fed Funds rate by a quarter percentage point to a benchmark rate of about 5%.

What stood out, however, was the use of softer language compared to prior Fed policy statements with the Fed saying it "anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time."

That language is likely in response to the upward revisions found in the Fed's latest economic projections that modest increases for this year in both personal consumption expenditure inflation to 3.3% from 3.1% and the uptick in core PCE inflation to 3.6% from 3.5%. We're not surprised by those upward revisions.

But the wording in today's statement of "additional policy firming" suggests that we are likely near the end of the hiking cycle when compared against prior language of "ongoing increases in the target range." Examining the Fed's updated economic projections, it continues to show an unchanged terminal rate target of 5.1%, which would be the midpoint of another quarter-percentage point rate hike.

Leafing through those projections, we see the Fed has adjusted its 2023 GDP forecast to 0.4% from 0.5%, likely factoring in recent bank failures. The Fed echoes our view the economy will likely hit a speed bump as a results -- "Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. The extent of these effects is uncertain."

However, the Fed once again leaves itself some wiggle room sharing it will "closely monitor incoming information and assess the implications for monetary policy."

What wasn't said in the policy statement is any appetite for cutting interest rates. As we reminded members this morning, the Fed has stated it will keep the Fed Funds rate at elevated levels until it's confident it has beaten back inflation. Matched up against the Fed's expectation the Fed Funds rate is likely to hit 4.3%, we are likely to see a lot of questions during the press conference peppering Powell about when the Fed could start to cut rates and how quickly it may do so. The answers to those questions are the ones that will likely shape the market's next move.

Fed Chair Powell's press conference typically gets underway around 2:30 p.m. ET, so about the time you're reading this. In the past the press conference can generate wide swings in the market.

As we did following the Fed's last monetary policy meeting, we'll be sharing post press conference thoughts with you in an AAP podcast later this afternoon.