Fed threads the needle

By the time of the FOMC announcement today, market expectations had coalesced around what turned out to be the actual outcome: a 25 basis point rate hike, accompanied by an increasing readiness to admit that the tightening cycle is nearing its end. This was not enough to prevent stocks from selling off sharply in the wake of the announcement, though it is hard to say if there was anything the Fed could have done today that would have pleased investors. 

Perhaps the most striking thing about the press release is the almost dismissive way it deals with the recent turmoil in financial markets. It baldly states that The US banking system is sound and resilient, before going on to note that Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation.  This implies that going forward, the Fed will be monitoring the extent to which tighter credit conditions resulting from the recent crisis may mitigate the need for further policy action. 

That being said, the Fed evidently does not want to give the impression that further rate hikes are completely off the table: 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 2 percent over time.  

Moreover,  the famous "dot plot" shows that FOMC members expect relatively elevated rates to stay in place for some time to come. Only one FOMC member expects the Fed funds target, now at 4.75-5.0 percent, to be below 5 percent at year end, while several expect it to be considerably higher. Expectations for 2024 centre around 4 percent, and for 2025 3 percent, still above the long-term expected value of 3.5 percent. 

Recent events, notably the sheer speed of the collapse of SVB, are literally without precedent. Both Fed Chair Powell and Treasury Secretary Yellen are hinting at the urgent need for a fresh round of regulatory reform (for which, read "tightening").  Today saw the Fed attempting to maintain the inflation fight without putting the financial system at further risk. That balancing act is likely to be needed for some time to come.