The Federal Reserve raised interest rates by 25 basis points as expected. What signals did the latest statement convey?

Written by: Mary Liu, BitpushNews

On Wednesday afternoon Eastern Time, the Federal Reserve announced a 25 basis point increase in the benchmark interest rate, in line with market expectations. This rate hike brings the Fed's target range to 4.5%-4.75%, the highest level since October 2007.

In a statement on Wednesday, Fed officials acknowledged that "inflation has eased," and no longer emphasized the upward pressure on inflation from the Russia-Ukraine war, which greatly boosted investors' expectations for a policy shift. Financial markets reacted quickly, with Bitpush terminal data showing the Nasdaq Composite Index rising 2% to close at 11,816.32 points, the S&P 500 Index up 1.05% to 4,119.21 points, and Bitcoin rising to $23,691 after the announcement, with a 24-hour increase of 3.31% as of the time of writing. The second-largest cryptocurrency, Ethereum, saw a similar increase, trading at $1,630.

Inflation Remains High

However, the central bank did not genuinely signal a pause in rate hikes. The meeting statement noted that "a continued increase in the target range will be appropriate," and they will determine the future rate hike magnitude based on the impact of previous hikes, the lag time for policy effects, and the development of financial conditions and the economy. In the post-meeting press conference, Powell also took a hawkish stance, reminding people of the destructive nature of inflation and committing to the Fed's goal of reducing the inflation rate to 2%.

Since June, the U.S. Consumer Price Index (CPI) has been declining monthly, with the current annual growth rate at 6.5%, down from 7.1% in November. The Personal Consumption Expenditures Price Index (PCE) also fell from 6.8% during the same period to 5% annually. However, the Fed stated that not all indicators are showing a downward trend.

Powell said, "We are actually seeing deflation in the goods sector. When we say inflation is coming down, that's a good thing. But core service indicators, excluding housing, have not shown deflation."

The Fed Expects Rate Hikes, But Not Larger Increments

The Fed's meeting statement indicated that it expects to "continue" raising rates and is discussing the "magnitude" of future hikes. This suggests another 25 basis point increase at the next meeting in March, leaving room for a similar hike in May.

Members of the Federal Open Market Committee (FOMC) stated in their report, "The committee expects that continued increases in the target range will be appropriate to achieve a sufficiently restrictive monetary policy stance to bring inflation back to 2% over time."

Fed officials had previously anticipated raising the benchmark rate range to 5-5.25% in 2023, higher than the 4.5% to 4.75% range set during this hike. Some economists worry that the smaller increments in rate hikes may make it difficult for the Fed to achieve its current forecasts.

Joe Davis, an analyst at investment firm Vanguard Group, wrote in a statement, "If inflation continues to trend downward, they may find it difficult to achieve a 5-5.25% increase through two additional 25 basis point hikes."

Powell stated at the press conference on Wednesday that the Fed's ultimate rate "will certainly be higher than our current record."

The Fed Expects Economic Growth to Slow in 2023, "But No Recession"

Powell indicated that most FOMC members do not expect a recession this year.

He emphasized at the press conference, "Different participants have different forecasts, but overall, these forecasts are for persistently subdued growth and some softness in the labor market, rather than a recession. Growth will continue to remain at a fairly low level this year, but there are other factors to consider."

He mentioned positive international economic conditions, improved consumer confidence due to deflation, and "cash-rich" state and local governments.

Compared to the wording in the FOMC's December meeting statement, the new statement indicates that the impacts of Covid-19 and the Ukraine war on the economy are waning.

After contracting in the first two quarters of 2022, the annualized growth rate of U.S. Gross Domestic Product (GDP) was 3.2% in the third quarter and 2.9% in the fourth quarter, with an annual growth rate of 2.1%. Economists say a soft landing will manifest in the data as several consecutive quarters of steady growth.

Brian Bethune, an economist at Boston College, wrote in an analysis report, "The Federal Open Market Committee is likely to design a soft landing for the economy, which will involve several quarters of steady growth."

Market Reaction Discrepancy with the Statement

U.S. stocks and the crypto market initially fell and then rose after the news release. Some analysts believe that this Fed meeting leaned towards being "slightly dovish," but there is a disconnect between the market's reaction and the Fed's hints.

James Butterfill, head of research at CoinShares, tweeted that today's Fed statement added "no real new content to drive the market; Powell tried to express a tough stance by stating that the work is not done, but the market is not buying it."

Charlie Ripley, senior investment strategist at Allianz Investment Management, told CNBC that the Fed's rate hike actions are nearing their end, and after the hikes conclude, the central bank may "stay put while economic data catches up with policy." He said, "The Fed is basically saying 'the same old story'; they imply that further rate hikes are appropriate but also acknowledge that they will consider tightening in future policy decisions."

Ronald Temple, chief market strategist at Lazard, commented, "The FOMC's statement indicates that further rate hikes may be appropriate, while the market has only digested one hike. Combined with today's near-record job vacancy report, I believe the market remains too 'dovish' regarding how high rates will go and how long they will be maintained; more resistance from the market will only lead the Fed to continue tightening conditions."