Fed delivers small rate hike, remains vague on future monetary policy moves

The Federal Reserve raised interest rates 25 basis points but seemed to give mixed signals on further monetary policy action. The benchmark lending rate was increase to a range of 4.75% to 5.00%, with updated projections showing more than half of the Fed policymakers still expect rates to rise another 25 basis points by the end of the year. The Fed’s post-meeting statement no longer said “ongoing increases” in rates will likely be appropriate. That was replaced with “some additional policy firming may be appropriate,” hinting that one more 25-basis-point hike may be seen at the next meeting before a pause. But policymakers said inflation “remains elevated” and while the median terminal rate held at 5.1%, there was an upward shift in the so-called “dot plot.” That seemingly leans a little hawkish, though the Fed “would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment” of its 2% inflation target.

The policy statement noted the U.S. banking system is “sound and resilient,” but it also said recent stress in the banking sector is “likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation.”

Officials projected inflation would be 3.3% at the end of the year, up from its prior forecast of 3.1%. The outlook for economic growth dipped slightly to 0.4% from 0.5% in the previous projections. The unemployment rate to end the year is forecast at 4.5%, slightly below the 4.6% seen as of December.

Fed Chair Jerome Powell in his post-meeting press conference said officials considered not raising interest rates at its meeting due to banking system stress but noted “rate cuts are not in our base case.” he anticipates rates topping out at 5.0% to 5.25% and staying there until inflation comes down.

Powell also noted that “balance sheet expansion is really temporary lending to banks” and “it’s not intended to directly alter the stance of monetary policy.” Powell said while the banking sector turmoil has added to uncertainty, there’s still a “pathway” to a soft landing for the economy as the Fed continues to work to contain inflation.