Executive summary
As markets widely expected, the Federal Reserve (Fed) raised interest rates by a quarter point (0.25%) and left the pace of its balance sheet runoff—known as quantitative tightening (QT)—unchanged. Accordingly, the market reaction was relatively muted.
While there were many considerations and the decision to hike wasn’t a slam dunk, hotter inflation data compelled the Fed to move forward. Conversely, Chair Powell acknowledged that recent tightening of lending standards within the banking industry were like de facto rate hikes, essentially doing some of the work for them.
Our base case is for a recession in 2023 as the lagged impact of higher interest rates and tighter credit conditions continue to weigh on the job market and the broader economy. While we believe that the Fed’s rate hiking cycle is done, we can't completely rule out a June hike if inflation does not continue cooling.

What happened
The Federal Open Market Committee (FOMC) unanimously agreed to increase its target range for the federal funds rate by a quarter point (0.25%) to a range of 5.00% to 5.25% at its May meeting. This was the tenth consecutive meeting with a rate hike, pushing the target rate up 5% in the past 15 months from essentially zero.
During the post-meeting press conference, Chair Powell mostly played defense, parrying repeated pointed questions from the financial press. Powell was rather frank in saying that monetary policy is currently tight, meaning that its restricting economic growth. Moreover, he acknowledged that tightening credit conditions on top of quantitative tightening (QT), which increases interest rates, mimic additional rate hikes.
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