FOMC: This is a Very Interesting Situation!
BOSTON, MA, March 14, 2023 — The Federal Open Market Committee (FOMC) met today for the second time in 2023 to assess the state of the U.S. economy and monetary policy.
What We Learned
The FOMC raised the Federal Funds Target Rate (fed funds) by 25 basis points (bps), a signal to markets that the FOMC remains committed to its inflation mandate. The target band now stands at 4.75-5.00%. Markets largely expected the move, even with the volatility created by the Silicon Valley Bank/Signature Bank/Credit Suisse calamity. Many market participants see this as evidence that the Fed, like other central banks, is distinguishing between monetary policy and financial stability. The Fed also referred to the recent market developments as leading to tighter credit conditions. This certainly was a factor in the committee’s decision to adjust its policy statement and outlook.
- The market currently reflects a high probability of a 25 bps fed funds increase at the next FOMC meeting on May 3rd.
- The market anticipates a peak fed funds rate of around 4.95% in early 2023 and then a reversal with fed funds at 4.25-4.50% by year end.
- The Fed continues to normalize its balance sheet via Quantitative Tightening (QT) at the previously stated maximum monthly cap of $60 billion of U.S. Treasury securities and $35 billion of agency mortgage-backed securities. QT reduces excess money supply and excess market liquidity.
The FOMC anticipates that “some additional policy firming may be appropriate.” To maintain policy optionality and flexibility, the statement notes that the Committee “will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals.” Similarly, Chair Powell emphasized in the press conference that the banking system is sound and resilient, and the Committee remains highly attentive to inflation risks.
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