Tightening conditions
A review of the March 2023 FOMC meeting and what's next
There was so much noise going into the Fed meeting yesterday.
Prior to the events of the last two weeks, during which we saw major bank failures, all that was important was the inflation data remaining upward sticky. The market was certain, and even Chair Powell alluded to higher rate hikes. The market was pricing in a 50bps hike and a terminal rate of 6%.
Today, we’re right back to where we were in December. The Fed raised rates by 25bps to 4.75% - 5.00%. The dot plot also remains unchanged with a terminal rate of 5.1% in 2023, i.e, a range of 5.00%-5.25%
We did see some changes to the FOMC statement with the removal of the term “ongoing rate increases will be appropriate” and being replaced by “additional policy firming may be appropriate”.
The Committee will closely monitor incoming information and assess the implications for monetary policy. 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. - FOMC Statement 22 Mar 2023
This, no doubt, is a substantial change and many seem to dwell on the fact that the Fed is indicating that they will be pausing soon. Yet, that doesn’t seem to be the message that Chair Powell was giving us.
Despite all the recent troubling events, Chair Powell seemed pleased that financial conditions are tightening the way they should, and he alluded to further tightening in financial conditions. He was clear that many of the indexes we look at for financial conditions don’t necessarily capture the lending conditions in the market, and with the recent bank issues, tighter lending conditions will likely be the end result.