The Federal Reserve extended its year-long fight against high inflation by raising its key interest rate a quarter-point despite concerns that higher borrowing rates could worsen the turmoil that has gripped the banking system.
Six key takeaways from the FOMC March meeting:
The Federal Reserve aims to achieve maximum employment and 2% inflation over the longer run. To support these goals, the Federal Open Market Committee has raised the target range for the federal funds rate to 4-3/4 to 5% i.e., a 25 basis point hike. The terminal rate projections remain unchanged at 5-5.25%.
Recent indicators show modest growth in spending and production, and job gains are robust with a low unemployment rate. Inflation remains high, and recent developments may result in tighter credit conditions that could weigh on economic activity, hiring, and inflation.
The Committee will monitor incoming information and assess the implications for monetary policy, anticipating that some additional policy firming may be appropriate to return inflation to 2% over time. The Committee will consider the cumulative tightening of monetary policy, lags in policy effects, and economic and financial developments when determining future increases in the target range. The Committee will continue reducing its holdings of Treasury securities and agency debt and mortgage-backed securities. The Committee is strongly committed to returning inflation to its 2% objective.
The Committee will monitor labour market conditions, inflation pressures, inflation expectations, and financial and international developments to assess the appropriate stance of monetary policy. The Committee is prepared to adjust monetary policy as appropriate to address emerging risks that could impede the attainment of its goals.
Important observations of the Fed chair, Jerome Powell
On financial crisis and how it impacts policy
• “The traditional indexes are focused a lot on rates and equities, and they don’t necessarily capture lending conditions. The question for us though is how the economic environment evolves going forward (referring to the current banking crisis). Our approach hence is going to be data driven at all times. Rate cuts for this year are not in our base case currently.”
On the path-way of soft landing after the SVB crisis
• “It’s too early to say, really, whether these events have had much of an effect (on credit conditions. Credit standards and credit availability will be affected the longer the banking crisis continues. I do still think though that there’s, there’s a pathway to [a soft landing. I think that pathway still exists, and, you know, we’re certainly trying to find it.
On rate hike expectations by the market and protection of depositor funds
• What I’m saying is you’ve seen that we have the tools to protect depositors when there is a threat of serious harm to the economy or to the financial system, and we’re prepared to use those tools. I think depositors should assume that their deposits are safe.
• If we need to raise rates higher, we will. I think for now, though ...we see the likelihood of credit tightening. We know that that can have an effect on the macro economy. Of course, we will eventually get to tight enough policy to bring inflation down to 2%.
On possibility of future rate hikes and considering rate cuts after recent bank debacles
• He highlighted the fact that the central bank’s summary of economic projections published Wednesday anticipates slow growth, a gradual decline in inflation and the rebalancing of both supply and demand within the labour market. In that most likely case, if that happens, participants don’t see rate cuts this year. The market hence is getting it wrong by projecting rate cuts this year. Rate cuts are currently not in the central bank’s “baseline expectation.
• The rate-setting committee did consider that (pausing rate hikes) in the days running up to the meeting. We are committed to restoring price stability and all of the evidence says that the public has confidence that we will do so that will bring inflation down to 2% over time. It is important that we sustain that confidence with our actions, as well as our words.
On inflation and the US economy
• The process of getting inflation back down to 2% has a long way to go and is likely to be bumpy. Inflation has moderated somewhat since the middle of last year, but the strength of these recent readings indicates that inflation pressures continue to run high.
• We believe, however, that events in the banking system over the past two weeks are likely to result in tighter credit conditions for households and businesses, which would in turn affect economic outcomes. It is too soon to determine the extent of these effects, and therefore too soon to tell how monetary policy should respond. As a result, we no longer state that we anticipate that “ongoing rate increases” will be appropriate to quell inflation. Instead, we now anticipate that “some additional policy firming” may be appropriate.
On tighter credit conditions and other important comments
• We believe however that events in the banking system over the past two weeks are likely to result in tighter credit conditions for households and business, which would in turn result affect economic outcomes. It is too soon to determine the extent of these effects, and therefore too soon to determine how monetary policy should respond.
• Our banking system is sound and resilient, with strong capital and liquidity. We will continue to closely monitor conditions in the banking system and are prepared to use all of our tools as needed to keep it safe and sound. In addition, we are committed to learning the lessons from this episode, and to work to prevent episodes from events like this from happening again.
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