NEW YORK (Reuters) – The Federal Reserve raised interest rates by half a percentage point on Wednesday and projected at least an additional 75 basis points of increases in borrowing costs by the end of 2023 as well as a rise in unemployment and a near stalling of economic growth.
The Fed’s latest quarterly summary of economic projections shows U.S. central bankers see the policy rate, now in the 4.25%-4.5% range after Wednesday’s 50-basis-point increase, at 5.1% by the end of next year, according to the median estimate of all 19 Fed policymakers.
The projection of the target federal funds rate rising to 5.1% in 2023 is slightly higher than investors expected before the meeting and appeared biased if anything to move higher.
At a press conference after the meeting, Fed Chair Jerome Powell said that it is too soon to talk about the U.S. central bank’s cutting interest rates and ruled out any changes to the Fed’s 2% inflation target.
STORY: STATEMENT TEXT:
MARKET REACTION:
STOCKS: The S&P 500 turned sharply lower then steadied down 0.11%
BONDS: Benchmark 10-year note yields rose then backed off to 3.4847%. The 2-year note yield rose to 4.23%
FOREX: The euro was about unchanged, up 0.46% at $1.0678
COMMENTS:
BRIAN COULTON, CHIEF ECONOMIST, FITCH RATINGS, LONDON
“We have all gotten so used to 75 basis points hikes – after four in a row – that this 50 basis point hike feels quite a bit less hawkish. But viewed in the context of historical norms this is still a rapid pace of tightening and reinforces the FOMC’s statement that they are still “highly attentive” to inflation risks. Moreover, the upward revisions to the 2023 DOT plot since September have been large, with a majority of FOMC members now viewing 5.25% (upper band) as an appropriate peak for rates in this tightening cycle. Back in September no members thought rates would need to exceed 5%.
CHRIS ZACCARELLI, CHIEF INVESTMENT OFFICER, INDEPENDENT ADVISOR ALLIANCE, CHARLOTTE
“The Fed is taking away the punchbowl just as the party was getting started. Despite a lower-than-expected CPI inflation report yesterday, the Fed’s statement today signals that they are going to be even more restrictive than they had previously indicated.”
“The market had rallied all week, punctuated by a big jump in stock prices after Tuesday’s CPI inflation report, but it quickly fell once it became clear that the Fed is planning to hold rates higher for longer.”
“The economy isn’t in recession yet, but as long as the Fed is aggressively raising interest rates it’s going to be hard for it to retain its resilience and the chances of a soft landing will go down proportionately with the Fed’s willingness to let up on rate hikes.”
BRIAN OVERBY, SENIOR MARKETS STRATEGIST, ALLY, CHARLOTTE, NC
“The Fed is staying with its hawkish stance. They’re reiterating their forecasts but the whisper number was that the Fed was going to stop at a 4.5%-4.75% terminal rate. That number was tossed around ever since the CPI number came out the other day.”
“But the Fed is out there saying that 5.1% is still on the cards … and that rate hikes will continue.”
“Hopefully Jay Powell will have a smile on his face when he is talking about the most recent data because everybody’s going to be hanging on every word. He has a right to have a smile on his face. Things are working out. You know, the biggest thing that is holding the Fed back right now are the jobs numbers. I think they would like to see unemployment get up towards 5%.”
ELLEN HAZEN, CHIEF MARKET STRATEGIST, F.L.PUTNAM INVESTMENT MANAGEMENT, WELLESLEY, MASSACHUSETTS
“The rate hike was not the story here, the story was the change in the SEP (Summary of Economic Projections) and you can see that in how the fed funds futures have changed. If you look at the fed funds futures before the announcement, they were pricing in a pivot starting in July or August of next year and now it is still around that time but it is at a higher rate. The question is not what they did this time but when they are going to pause and that looks like it has remained about the same with the pause expected at the May meeting and then how quickly and whether or not they decline. But if you look at the statement of economic projections, two things that really jump out are GDP projections for next year just plummeted versus what they were looking for in September, so they are seeing their actions are having an effect on the economy. The other thing that really jumps out is how much they increased December 2023 so the fed funds dots went up by half a point, that is a big difference.”
“They are not going to be able to pause in the first quarter and they are probably not going to be able to pause in the second quarter.”
RANDY FREDERICK, MANAGING DIRECTOR OF TRADING AND DERIVATIVES, CHARLES SCHWAB, AUSTIN, TEXAS
“We’ve had two up days recently leading into this. Secondly, the terminal rate that had been talked about prior to this was somewhere in the 4.6% to 4.8% range and that has been raised up to 5.1%, so that may be what is the concern.”
“Given that this was pretty much right on target, I don’t really see it as a major drag on the markets at all.”“It was pretty much right on target with what was expected. If the markets closed positive today or modestly lower, that would be a very positive development. With the last two rate hikes we had the markets drop on the day it occurred and the following day.”
KARL SCHAMOTTA, CHIEF MARKET STRATEGIST, CORPAY, TORONTO
“Taken together, today’s statement and economic projections tell a simple, but persuasive story: this Fed isn’t prepared to “pivot” in any meaningful way until it sees sustained and conclusive evidence of a reversal in inflationary pressures.”
BRIAN JACOBSEN, SENIOR INVESTMENT STRATEGIST, ALLSPRING GLOBAL INVESTMENTS, MENOMONEE FALLS, WISCONSIN
“The most interesting part of the releases were in the Summary of Economic Projections. The most dovish participants is looking for an extra 50 bps of hikes. The most hawkish ones are looking for 125 bps. When we get out to 2024, there’s massive disagreement. The end is near for rate hikes, but the end isn’t here, yet.”
ROB HAWORTH, SENIOR INVESTMENT STRATEGIST, U.S. BANK WEALTH MANAGEMENT, SEATTLE
“(The sell-off) It’s coming from summary of economic projection, that’s pressuring the equity market. (The Fed’s) end of 2023 dot is at 5.25%, that’s more than projected. And they’re holding it there longer than markets expected.”
“In addition, they’re downgrading GDP estimates for this year, and in particular, for next year. That means they’re willing to tolerate more economic pain to get inflation down to where they think it should be.”
“That’s why they’re holding interest rates higher for longer and the market is acting they way it is. This is a Fed that is amply hawkish. There’s lots of work ahead for the Fed and not a lot of great news for the economy.”
“We think (the economy is) slowing and there is risk of negative growth. The key question is are consumers going to keep spending or will they soften that pace?”
(This story has been refiled to fix a typographical error in the Haworth quote, “than” instead of “that”, in paragraph 22)
(Compiled by the Global Finance & Markets Breaking News team)