Economic Commentary

Executive summary

The Federal Reserve (Fed) raised interest rates by a quarter point (0.25%) as expected by markets. The Fed also left the pace of its balance sheet runoff—known as quantitative tightening (QT)—unchanged.

In the spirit of data dependence, the Fed’s actions followed inflation data, which remains hotter, though clearly cooler than during mid-2022. 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.

During the post-meeting press conference, Chair Powell threw cold water on the notion that the Fed will be cutting rates in 2023 as aggressively as markets had expected. Accordingly, stocks sold off. Meanwhile, yields fell, especially for shorter duration bonds.

A recession remains our base case as dramatically higher interest rates place additional stress on consumers and businesses going forward. We also maintain our view that, while it has clearly peaked, elevated inflation remains public enemy number one.

What happened

At its March rate-setting meeting, 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 4.75% to 5.00%. With today’s move, the Fed has pushed the target rate up 4.75% in the past year from essentially zero.

Additionally, the FOMC released its March statement of economic projections, which sees slower economic growth next year compared to the December projections. More importantly, the so-called dot plots held expectations steady for where the federal funds rate might be by year-end 2023 but increased next year’s end point.