At the March 22 Federal Open Market Committee (FOMC) meeting, Federal Reserve Chairman Jerome Powell announced a 25 basis point increase in the federal funds rate. The move came as little surprise to Wall Street, with markets having already priced in almost 80% certainty that the central bank would raise rates by 25 basis points.

Some positive news is that the Fed said further rate hikes aren’t necessarily a given and will depend on the pace of inflation and other data points in the coming weeks. “The Committee will closely monitor incoming information and assess the implications for monetary policy,” the FOMC’s post-meeting statement said.¹ “The Committee 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 two percent over time.”

The knee-jerk reaction in markets Wednesday was positive, but it was volatile at the close following conflicting reports out of Washington on new proposals for FDIC insurance.

Shift in outlook on future hikes?

This marks the first time the Fed changed its language on rate increases since it began raising borrowing costs last year.

“While the Fed probably feels like its fight against inflation is not yet over, the Fed’s comments suggest that they are willing to take things more slowly now that rates are at their highest level since September 2007,” said Shawn Snyder, Global Investment Strategist for J.P. Morgan Wealth Management.

“The cost of credit is higher and lending standards are tighter,” Snyder continued. “We think these dynamics could slow growth and inflation from here, and potentially accelerate the path to recession.”

The latest quarter-point increase brings the benchmark federal funds rates to a target of between 4.75% and 5%. For context, that’s the rate banks charge each other for overnight lending which also impacts what consumers pay for mortgages, auto loans and credit cards. Any increase means the cost of borrowing is generally higher.

The expected terminal rate—or point at which the Fed would stop raising rates—was placed at 5.1%² based on expectations of individual FOMC members. That is unchanged from the last estimate in December and implies that most Fed officials anticipated just one more rate hike.

“The Fed has yet to pivot, but it did blink,” said Snyder. “After much discussion of the potential for a 50 basis point rate hike, the Committee settled on just a 25 basis point rate hike and shifted away from its ‘ongoing increases’ language.”

Expectations leading up to the meeting

For most of 2022, inflation was at near a 40-year high and unemployment remained low. That prompted the Fed to intervene by launching a rate-raising campaign that has carried into 2023. In 2022 the Fed raised rates seven times and then once in January 2023. The most recent move marks the ninth rate hike in a row.

But heading into the March 2023 meeting, traders had hoped the Fed may change its hawkish stance since recently inflation has been easing. For February, the year-over-year Consumer Price Index (CPI) came in at 6%³, lower than January’s year-over-year read of 6.4%.⁴

View on banks

The Fed took pains to reassure the markets that the banking system was okay, calling it “sound and resilient” in the wake of two regional bank failures. The central bank is increasing interest rates to tame inflation, but rising rates will impact bank balance sheets and further slow lending. In the statement following the meeting, the Fed warned of some potential pain to come. “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. The Committee remains highly attentive to inflation risks.”

During a post-meeting press conference, Powell said that in the wake of the bank closings the committee did mull pausing rate hikes but opted against it because inflation and labor market data were stronger than expected before the bank closings.

“Despite the recent turmoil in the regional banking sector, the Fed expressed its confidence by saying that the U.S. banking system is ‘sound and resilient.’ However, it also gave nod to the prospect of tighter credit conditions for households and corporations moving forward,” said Snyder. “If banks do indeed tighten their lending standards as a result, it will effectively serve as a substitute for additional rate hikes from the Fed. Potentially doing their job for them.”

What may be next?

While the Fed signaled it may not raise rates much more, stocks still finished the day lower as Treasury Secretary Janet Yellen suggested that the Treasury was not considering “blanket insurance” for bank deposits.

“Our view is that once the Fed hits its terminal rate, it will attempt to hold the rate there for the remainder of 2023. The determining factor in if the Fed will accomplish that will be the labor market. Traditionally, the Fed has cut rates once the unemployment rate starts to trend higher, which we think may happen in the back half of 2023. Even the Fed is now predicting rate cuts in 2024,” Snyder said.