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By Yasin Ebrahim
Investing.com — The Federal Reserve raised interest rates by 0.25% on Wednesday, and maintained its forecast for one more hike this year, pushing monetary policy into restrictive territory amid tightening credit conditions and signs of financial instability following a wobble in the banking sector.
The Federal Open Market Committee, the FOMC, raised its benchmark rate to a range of 4.75% to 5% from 4.5% to 4.75% previously.
It was the second-straight quarter-point rate hike since the Fed downshifted from a 50-basis point rate hike earlier this year. The Fed said, however, that 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.”
The Fed kept its benchmark rate forecast unchanged from December, forecasting a terminal rate, or peak rate, of 5.1%% in 2023, suggesting at least one more hike.
The Fed’s reaction function has been dominated by inflation data for months as its maximum employment goal has played second fiddle amid a strong labor market. But the recent wobble in the banking sector hijacked the narrative on monetary policy and fueled much uncertainty about the rate-hike path ahead.
The recent collapse of Silicon Valley Bank and Signature Bank (NASDAQ:SBNY) has filtered into the Fed’s thinking on monetary policy as members acknowledge that tighter credit conditions could support the Fed in its fight against inflation.
“The U.S. banking system is sound and resilient. Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation,” The Fed said in a statement.
Inflation still well above the 2% target, the central bank stressed further tightening was required to push monetary policy into restrictive territory. The FOMC revised its inflation forecasts for this year and next year higher.
The core personal consumption expenditures price index, the Fed’s preferred measure of inflation, is forecast to climb to 3.6% in 2023, up from a prior forecast of 3.5%. For 2024, inflation is estimated to slow to 2.4%, compared with the prior forecast of 2.5%. Fed members kept their inflation forecasts for 2025 unchanged at 2.1%.
The strength in the labor market that has played a role in keeping core services ex-housing inflation, which drives the bulk of price pressures isn’t expected to change anytime soon.
The unemployment rate is expected to be 4.5% in 2023, down from a prior estimate of 4.6%, but tick up down 4.5% next year, unchanged from a prior forecast, according to the Fed’s projections. For 2025, the unemployment rate is expected to rise to 4.6%, slightly higher than the 4.5% estimate previously.
The Fed’s balance sheet, meanwhile, has also come into focus after it began expanding again in the wake of jitters in the banking system. The Fed’s balance sheet now stands at $8.6 trillion, up from $8.34 trillion last month.
The dramatic reversal from contraction to expansion in the Fed’s balance sheet followed a rise in funding costs and the central bank’s new bank lending facility that sought to support the banking system.
The new lending facility allows banks access to loans of up to one-year using qualifying assets including any underwater, or below par, bonds as collateral.
Traders are expected to shift attention to Powell’s press conference at 2.30 PM ET (19:30 GMT), with Powell’s messaging about the tug of war between inflation and financial stability expected to be front and center.
“The hawkish or dovish market read may come down to whether Powell focuses more on financial or price stability in the press conference,” Citi said in a note.
Source: Investing.com