Market Wire: Federal Reserve Raises Rates, Warns Additional Tightening Will Come

The Federal Reserve’s rate-setting committee raised its benchmark rate by a quarter percentage point and said it still thinks “ongoing increases in the target range will be appropriate” - verbiage that suggests that a long-awaited pivot in policy has not yet arrived.

At the conclusion of its first two-day meeting in 2023, the Federal Open Market Committee unanimously voted to raise the target range for the federal funds rate to 4.50-to-4.75 percent, with no dissents in favour of a smaller or larger move. This brings the rate to levels last seen in September 2007.

In the official statement setting out the decision, policymakers noted “modest growth in spending and production” in recent data, and highlighted ongoing strength in the labour market, saying “Job gains have been robust in recent months, and the unemployment rate has remained low”.

In a sign of cautious optimism, the statement said “Inflation has eased somewhat but remains elevated” — a change from previous language that simply noted “elevated” price pressures.

And in what could be a critically-important sentence, policymakers said “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” - suggesting that at least two more hikes could come at the March and May meetings.   

Markets tumbled modestly in the moments after the release as traders raised forecasts for where interest rates might peak. US equities slumped, two- and ten-year government bond yields rose and the dollar ticked higher.

Focus is now shifting to the press conference, where Jerome Powell is expected to tell overly-ebullient investors that the Fed has not seen conclusive evidence of a decline in inflation, that more policy tightening is needed, and that rates won’t begin coming back down until price growth subsides on a sustained basis. Overly-ebullient investors likely won’t believe him.

The Bank of England and European Central Bank are each expected to deliver their own half-percentage-point increases tomorrow morning.