– FOMC Participants Leave Median Projected Rate for End of 2023 at 5.1%
– Powell Sees Bank Credit Tightening ‘Substituting’ For Some Fed Rate Hikes
– Powell: 2023 Rate Cuts ‘Not in Our Baseline’; Will Tighten More If Needed:
By Steven K. Beckner
(MaceNews) – Pulling its monetary punches in the wake of unanticipated financial turbulence, the Federal Reserve raised interest rates again Wednesday, but only moderately – rejecting calls for a “pause” in Fed rate hikes, but also retreating from tentative plans to resume more aggressive tightening.
A year after it stopped holding the federal funds rate near zero, the Fed’s rate-setting Federal Open Market Committee raised that key money market rate another 25 basis points to a target range of 4.75% to 5.0%.
The FOMC left the door open to further rate hikes, but with greater hesitancy, while FOMC participants left unchanged their funds rate projections for the remainder of the year, instead of raising them as they had been expected to do before a series of recent bank failures and related financial market turmoil.
Chair Jerome Powell, speaking to reporters after the FOMC rate decision was announced,
repeatedly stressed the Fed’s continued commitment to reducing inflation to 2%, but he also put great emphasis on how the tightening of credit conditions that has occurred lately could have the same effect as Fed rate hikes and “substitute” for them to some extent.
Powell said the amount of further rate hikes will depend on the extent and duration of credit tightening. He virtually ruled out rate cuts this year and suggested the FOMC might have to raise rates more if tighter financial market conditions don’t help the Fed with its objectives of “re-balancing supply and demand” and reducing inflation.
Two weeks ago, financial markets were expecting a 50 basis point rate hike after a series of worrisome reports on inflation, labor markets and consumer demand led Powell to warn that the Fed was “prepared to increase the pace of rate hikes” in two days of congressional testimony March 7-8.
But that was before the failure of Silicon Valley Bank and Signature Bank and related financial turmoil prompted the Treasury, the Fed, and the Federal Deposit Insurance Corporation to bail out large depositors and take emergency steps to pump liquidity into the banking system.
Seeking to balance its “price stability” mandate with its responsibility to protect financial stability, the FOMC chose a more modest quarter point rate hike, and took a less aggressive tone in its forward guidance on future rates.
In its new policy statement, the FOMC said it “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.”
By contrast, in its Feb.1 statement, the FOMC had anticipated that “ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.”
The FOMC repeated that “in determining the extent of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”
The decision comes three days after the Fed and other major central banks coordinated the reactivation of dollar liquidity swap lines in a Sunday evening announcement. The previous Sunday night, the Fed played its “lender of last resort” role by creating a special lending facility – the Bank Term Funding Program – to provide liquidity to troubled banks.
The FOMC preceded the new statement on rates by warning again that “inflation remains elevated,” but then added cautionary language about the banking system problems and their potential impact on the economy.
The FOMC declared that “the U.S. banking system is sound and resilient,” but added, “Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. The extent of these effects is uncertain.”
Despite financial stability concerns, the statement reiterated that “The Committee remains highly attentive to inflation risks.”
Until very recently, FOMC participants were widely expected to substantially increase their projections of how high the funds rate will need to go this year in their revised, quarterly Summary of Economic Projections. But in wake of commotion in the banking system, they left the median funds rate projection for the end of 2023 at 5.1%, to which they had raised it in December from 4.6%,
There was considerable disagreement over how high the funds rate needs to go this year, however, as rate projections ranged from 4.9% to 5.9%.
Although they left the median funds rate for 2023 unchanged, Fed officials increased their funds rate projection for next year from 4.1% to 4.3%.
The new rate projections were accompanied by revised forecasts for inflation, unemployment and GDP growth. Officials now see the price index for personal consumption expenditures (PCE) rising by 3.3% in the fourth quarter of 2023, compared to the fourth quarter of 2022. That’s up from the 3.1% rate forecast in December. The core PCE is seen rising 3.6%, up from 3.5% in December.
The higher inflation forecasts come in wake of worse than expected inflation data to start the year.
After revising up the December consumer price index to show a 0.1% increase, instead of the initially reported 0.1% decline, the Labor Department reported a bigger than expected 0.5% January jump that left the CPI up 6.4% from a year earlier. The PCE index rose 0.6% in January, leaving the Fed’s favorite inflaiton gauge up 5.4% from a year ago.
The CPI moderated in February to a 6% annual rate, but that was still triple the Fed’s target.
Fed governors and presidents forecast the unemployment rate will average 4.5% in the fourth quarter of this year, compared to 4.6% in the December SEP.
Real GDP is forecast to grow by 0.4% on a fourth quarter over fourth quarter basis this year, compared to December’s forecast of 0.5%
In his press conference, Powell delicately divided his policy comments between vigilance on inflation and guarding the financial system.
Echoing the FOMC statement’s assertion that the Fed “remains highly attentive to inflation risks,” Powell declared that he and his fellow policymakers “remain strongly committed to bring inflation back down to 2%,” and he said the goal is to do that “as soon as possible.”
As he had in recent Congressional testimony, Powell said there is still little sign of “disinflation” in core service prices excluding housing in the face of “extremely tight labor markets.”
However, Powell sounded very uncertain about how much more rates will need to rise to make monetary policy “sufficiently restrictive’ to achieve the Fed’s 2% inflation goal.
He was emphatic in saying rates have not reached that level yet. He said a pause in rate hikes “was considered” by the FOMC, but said the 25 basis point rate hike “was supported by a very strong consensus” because “the inter-meeting data on inflation and the laobr market were stronger than expected.”
In face of elevated inflation, FOMC members concluded that, because markets and the public had become confident that the Fed was committed to reducing inflation, Powell said he and his colleagues felt “it was important that we sustain that confidence in our actions as well as our words.”
Powell added that the Committee also concluded that “some additional policy firming may be appropriate.”
Asked if the Fed might cut rates this year, as some market players expect, Powell said “that is not our base case,” and he pointed to the median funds rate projection of 5.1% at year’s end.
Fed officials “don’t see rate cuts this year:, they just don’t,” he said. “The path of economy is uncertain … but that’s not our baseline expectation.”
Powell did, however, indicate that rate hikes are apt to be more limited in wake of the recent bank failures because of tighter lending standards and conditions.
“(T)he events of the last two weeks are likely to result in some tightening of credit conditions for households and businesses and, thereby, weigh on demand on the labor market and on inflation,” he said. “Such a tightening in financial conditions would work in the same direction as rate tightening.”
“In principle, as a matter of fact, you can think of it as being the equivalent of a rate hike, or perhaps more than that,’ he continued. “Of course, it’s not possible to make that assessment today with any precision whatsoever.”
It was a point Powell made several times during the course of the press conference.
“For purposes of our monetary policy tool, we’re looking at what’s happening among the banks and asking is there going to be some tightening of credit conditions,” he said at another stage. “Then we’re thinking about that as effectively doing the same thing rate hikes do.”
“In a way, that substitutes for rate hikes,” he added.
“So, the key is we have to have — policies have to be tight enough to bring inflation down to 2% over time,” he went on. “It doesn’t all have to come from rate hikes. It can come from, you know, from tighter credit conditions. So, we’re looking at — it’s highly uncertain how long the situation will be sustained or how significant any of those effects would be. So we’re just going to have to watch.”
Despite the probable offsetting effect of bank credit tightening, Powell insisted the Fed’s hands are not tied in terms of the amount of possible further Fed rate action.
“No, absolutely not,” he exclaimed. “No. If we need to raise rates higher, we will.”
“I think for now, though, we, as I mentioned, we see the likelihood of credit tightening,” Powell reiterated. “We know that that can have … an effect on the macro-economy, on demand, on labor market, on inflation. And we’re going to be watching to see what that is. And we’ll also be watching what’s happening with inflation. And in the labor market.”
“So, we’ll be watching all those things,” he continued, “and, of course, we will eventually get to tight enough policy to bring inflation down to 2%.”
“We’ll find ourselves at that place,” he vowed.