Federal Open Market Committee Statement: March 2023
Market Views from the Global Fixed Income, Currency & Commodities (GFICC) group
U.S. Rates Team
In line with market expectations, the Federal Open Market Committee (FOMC) voted to raise the federal funds rate by 25 basis points (bps) to a target range of 4.75% – 5.00%. There were no dissents.
- Economic Assessment and Outlook
The economic assessment was brief. Growth is modest, inflation remains elevated, and the unemployment rate is low.
A reference to banks was added which stated that the banking system was “sound and resilient” but recent developments would put downward pressure on growth and inflation through tighter credit conditions.
- Current Policy and Forward Guidance
The Committee softened the reference to “ongoing increases” in the fed funds rate suggesting “some additional policy firming may be necessary”.
The Fed continued to communicate that the “extent” of future rate hikes will be dependent on the economic data and financial conditions.
Summary of Economic Projections:
- The dot plot gave us a refreshed indication of the Committee’s expectation for the path of the Fed Funds rate, which was broadly unchanged (only 2024 was revised up by 0.125%).
The median of the Committee continues to expect the policy rate to peak at 5.125% in 2023. All committee members but 1 see a terminal rate between 5% and 6%.
Additionally, the median member expects 200bps of rate cuts between 2024 and 2025 once Core PCE has fallen below 3% and the unemployment rate is at 4.6%.
- Investors also received FOMC participants’ revised outlooks for growth, inflation, and employment:
Growth was revised slightly lower in 2023 to 0.4% from 0.5% and lower in 2024 to 1.2% from 1.6%.
Unemployment estimates were mostly unchanged relative to December.
On Core PCE, estimates were revised higher by 0.1% in 2023 and 2024 to 3.6% and 2.6% respectively, but unchanged in 2025 with the median expecting inflation to fall to 2.1%. The number of participants viewing inflation risks as weighted to the upside declined from 17 to 11.
Chair’s Press Conference:
Chair Powell offered insight into the thought process on hiking 25bps, as well as the path ahead.
- Rate Hikes/Forward Guidance:
While economic data has been stronger than expected, “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's too soon to determine the extent of these effects and too soon to tell how monetary policy should respond.”
Because of this, the committee no longer thinks “ongoing rate increases” to be appropriate, but instead maybe “some additional policy firming.”
With regards to this meeting, the Fed did consider a pause, but ultimately the decision to hike 25bps was supported by a strong consensus, with the primary reason being the strong economic data, as well as a desire to sustain the market’s confidence that they will achieve their 2% inflation objective.
Regarding the banking issues over the past two weeks, the Fed believes it will likely “result in some tightening of credit conditions for households and businesses and, thereby, weigh on demand on the labor market and on inflation. 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,” although it is impossible to be certain. Should this turn out to be wrong, “you’d need more rate hikes.”
GFICC view: The Fed anticipates banking stresses will tighten credit conditions from here in lieu of further rate hikes; they will need to see evidence to the contrary vis-à-vis continued strong job reports and sticky/re-accelerating inflation to re-engage the hiking cycle.
- Banking System:
The Chair expressed his confidence that the banking system is “sound and resilient with strong capital and liquidity.” They will continue to monitor the situation but are “prepared to use all of our tools as needed to keep it safe and sound.”
- In 2022, high inflation and low unemployment caused the Fed to raise policy rates well into restrictive territory. Today, the risks to policy are becoming more balanced as the cumulative and lagged impact of monetary policy slows the real economy, puts downward pressure on inflation, and tightens credit conditions.
- As we approach the end of the rate hiking cycle, the government bond market should continue to see demand from investors looking to lock in relatively high risk-free rates. The cumulative and lagged impact of tighter monetary policy will continue to slow activity and push prices lower, eventually leading to the consideration of rate cuts later in the year. As a result, we expect the 10-year yield to move towards a 3.00% – 3.50% trading range by year end.