The rate is now where it last was during the 14-month-long pause from June 2006 to August 2007.
By Wolf Richter for WOLF STREET.
The Fed’s FOMC raised its five policy rates by 25 basis points today, which pushed the upper end to 5.25%, having now hiked by 500 basis points in 14 months. The vote was unanimous. It hiked:
- Federal funds rate target to a range between 5.0% and 5.25%.
- Interest it pays the banks on reserves to 5.15%.
- Interest it charges on overnight Repos to 5.25%.
- Interest it pays on overnight Reverse Repos (RRPs) to 5.05%.
- Primary credit rate to 5.25% (what banks pay to borrow at the “Discount Window”).
With today’s policy move, the upper end of the federal funds rate target is now where it last had been during the pause of 14 months, from June 2006 to September 2007. Plateaus after a series of rate hikes are the rule. In 2018, the plateau (at 2.5%) lasted seven months. In 2000, the plateau (at 6.5%) lasted eight months:
But now there’s the worst bout of inflation in 40 years, amid doubts that the Fed has hiked rates enough to bring inflation back under control, and all bets are off about the length of the pause, or if the Fed will end the pause with a rate cut or a rate hike. The Reserve Bank of Australia just un-paused its policy and hiked out of the pause by another 25 basis points. So there’s that.
Language in the statement did not lock in the long-awaited pause. The statement didn’t mention “pause” at all, but instead said:
“In determining the extent to which additional policy firming may be appropriate to return inflation to 2 percent over time, 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.”
This gives the Fed room to move either to a pause or another hike at the next meeting.
In the March statement, the phrase on the prior statements, “ongoing rate increases will be appropriate,” was replaced by “some additional policy firming may be appropriate.”
On today’s statement, the March phrase, “some additional policy firming may be appropriate,” was replaced by, “In determining the extent to which additional policy firming may be appropriate…”
QT will continue on track, with the Treasury roll-off capped at $60 billion per month, and the MBS roll-off capped at $35 billion a month, same as in the prior months.
Today’s rate hits the “dot plot” projection for year-end. Near the end of each quarter, so in four of its eight meetings per year, the Fed releases its “Summary of Economic Projections” (SEP), which includes the “dot plot,” Today was one of the four meetings a year when the Fed doesn’t release a SEP. In the March SEP, the median projection for the federal funds rate at the end of 2023 was 5.125%. With today’s rate hike, which put the federal funds target range between 5.0% and 5.25%, reaches this projection.
On the banking crisis and its impact on inflation, if any, the statement said: “The U.S. banking system is sound and resilient. Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks.”
And here is how Powell did in the post-meeting press conference: Powell Swats Down Rate Cut in 2023, Purposefully Leaves “Pause” for June Meeting in Doubt
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