Northwest Bank | FOMC Update

March 22, 2023 | As expected, the Fed raised rates by 0.25% at yesterday’s meeting to a target rate of 4.75% to 5.00%. There was very little mystery to what the FOMC was going to do today, as futures markets were pricing in a nearly 85% chance that the Fed would raise by 25-basis points. The other 15% chance was that the Fed would leave the short-term fed funds rate as is. While this was the expected move today, it was very different than a month ago when there was a 25% probability the Fed would raise rates by 0.50%. 

As has been the case for any recent FOMC meeting, investors are more focused on guidance about future policy changes. The statement released after the meeting showed some softening of language about future rate increases. “The Committee 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.” The Fed is at least thinking about the end of the current tightening cycle. While there was an acknowledgement of the recent concerns in the banking sector the FOMC statement described the U.S. banking sector as “sound and resilient.” 

The FOMC also released its summary of economic projections today as an update to its December expectations. Policy expectations remained the same with the Federal Reserve Board members still with a median fed funds rate projection of 5.1%. There were small changes in other categories with higher inflation expectations and lower growth for 2023. 

In the post-meeting press conference, Fed Chair Jerome Powell made points similar to most of the recent Fed meetings stating both that “inflation remains too high,” and “we remain strongly committed to bringing inflation back down to our 2 percent goal.” While the Fed is clearly not done raising rates, they are beginning to think about where the current cycle will end. 

When March CPI is released in April, it will almost certainly show a decline in year over year inflation with the reading this year expected to be well below the 1.24% monthly gain in March of 2022. This will bring the year over year CPI below 6% for the first time since September of 2021. While this does represent a lower trend for inflation, it is still well above the Fed’s 2% target. 

Complicating matters for markets, at the same time Powell was speaking, Treasury Secretary Janet Yellen said before a Senate panel that the Treasury was “not considering” expanding FDIC coverage to all deposits. 

After Powell finished the press conference, markets declined with the Standard and Poor’s 500 falling by 1.7%. We expect markets to continue to experience elevated volatility as investors continue to face a very uncertain environment. 

Donald B. Nicholson, CFA 
Chief Investment Officer and Division Senior Vice President 
Northwest Bank 
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