The Federal Reserve raised its benchmark interest rate for the ninth consecutive policy meeting Wednesday, defying calls for a pause in tightening amid the ongoing U.S. banking crisis, adding that "additional policy firming" could still be needed in order to tame elevated inflation.
The Fed lifted its Fed Funds rate by 25 basis points to a range of 4.75% to 5%, the highest since 2008, and said policy makers remain "highly attentive to inflation risks"
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The Fed's new "Summary of Economic Projections" meanwhile, held to its forecast of a terminal Fed Funds rate of just over 5.1%, suggesting at least one more rate hike, even as officials indicated faster inflation estimates than in the December report.
"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% over time," the Fed statement said. "In determining the extent of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments"
In a nod to the ongoing banking crisis, triggered by the collapse of Silicon Valley Bank and Signature Bank and the turmoil at First Republic, the Fed insisted the broader financial system remains "resilient".
"The U.S. banking system is sound and resilient," the Fed said. "Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation."
On Wall Street, U.S. stocks pared earlier gains following the Fed statement and Chairman Jerome Powell's press conference in Washington, with the S&P 500 marked 2 points lower on the session while the Dow Jones Industrial Average slipped 82 points. The tech-focused Nasdaq was marked 5 points lower.
Benchmark 10-year Treasury note yields slipped 4 basis points lower to 3.485% while 2-year notes fell 15 basis points to 3.981%. The U.S. dollar index, meanwhile, was marked 0.53% lower at 102.054 in the wake of the Fed announcement and prior to Powell's press conference in Washington.
"Not signaling a higher terminal rate should send a message to market participants that the economy may be weaker than recent economic data suggests," said Charlie Ripley, Senior Investment Strategist for Allianz Investment Management in Minneapolis. "While hard to measure, it is clear the committee recognizes there will be an economic impact resulting from tighter credit standards in the banking sector."
"Whether this meeting ends up being the one-and-done scenario or they are able to squeeze out another hike out in May remains to be seen, but the reality from here is the Fed is likely going to emphasize a broader set of conditions in policy decisions rather than focusing specifically on inflation and labor market conditions," he added.
Markets are now pricing in a 43.8% chance that the Fed will hike rates by another 25 basis points in May, but the balance of bets for the Fed's June meeting suggest rates holding at between 4.75% and 5% into the summer and beyond, with a small rate cuts priced-in for the Fed's November meeting.
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