Marble facade of the Federal Reserve Building, Washington DC..

Yesterday marked a year since the Fed’s tightening cycle began, and they pressed ahead. The central bank chose to raise its policy rate by another 25 basis points—bringing the target range to 4.75%-5.00% (the highest since 2007).

They also released the latest update to their “dot plot,” a chart that summarizes FOMC members’ outlooks for the federal funds rate. The chart showed that the median member expects policy rates to finish this year around 5.1%, and then decline to 4.1% by the end of 2024. The read: Prepare for one more hike this year, and cuts to come in the year thereafter.

In simpler terms, this means that interest rates (which inform the cost of getting a loan to buy a house, fund a business, etc.) will stay elevated for the foreseeable future. Alongside the stress in the banking system, it also means that lending standards could stay tight—meaning, getting a loan in the first place, regardless of how much it costs, could be more challenging.

We would be remiss not to touch on comments from Secretary Treasury Janet Yellen that hit the tape at the same time as Fed Chair Powell’s press conference. In an effort to address speculation that arose in the wake of authorities announcing a backstop for all depositors at SVB and Signature Bank, Yellen said that the Treasury is not considering a broad increase in deposit insurance at this time. We’re grateful for the update, but note that it’s likely to keep markets on edge when it comes to uncertainty around the potential fallout from further stress on regional banks.

The bottom line: Today’s move signals that the Fed has confidence that the economy is still strong enough to handle higher rates, and that the overall banking system is sound. Powell made sure to emphasize that his crew is well aware of the prevailing risks, too, and that they warrant monitoring.

All in all, we think the latest banking shock, coupled with higher interest rates, could accelerate the onset of a U.S. recession… but also a sustainable cooldown in inflation.

The Fed signaled it's not quite hiking—but it depends on the data

The Fed signaled it's not quite hiking—but it depends on the data

Sources: Federal Reserve, Bloomberg Finance L.P. Data as of March 22, 2023.

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