NEW YORK (Reuters) – The Federal Reserve on Wednesday raised interest rates by a quarter of a percentage point, but indicated it was on the verge of pausing further increases in borrowing costs amid recent turmoil in financial markets spurred by the collapse of two U.S. banks.
The move set the U.S. central bank’s benchmark overnight interest rate in the 4.75%-5.00% range, with updated projections showing 10 of 18 Fed policymakers still expect rates to rise another quarter of a percentage point by the end of this year, the same endpoint seen in the December projections.
But in a key shift driven by the sudden failures this month of Silicon Valley Bank (SVB) and Signature Bank, the Fed’s latest policy statement no longer says that “ongoing increases” in rates will likely be appropriate. Instead, the policy-setting Federal Open Market Committee said only that “some additional policy firming may be appropriate,” leaving open the chance that one more quarter-of-a-percentage-point rate increase would represent at least an initial stopping point for the rate hikes. STORY:
MARKET REACTION:
STOCKS: The S&P 500 turned 0.29% higher
BONDS: Benchmark 10-year note yields fell to 3.5223% after the decision; The 2-year note yield fell to 4.033%
FOREX: The euro extended a gain and was last up 0.71% at $1.0844
COMMENTS:
KARL SCHAMOTTA, CHIEF MARKET STRATEGIST, CORPAY, TORONTO:
“I think the Fed did take the path of least resistance here, hiking but also providing a relatively dovish outlook on rates over the year ahead. That essentially gives markets what they were looking for.”
“I think the clear, big sentence in the statement itself, that was sort of interesting here was, ‘Recent developments are likely to result in tighter credit conditions for households and businesses, and to weigh on economic activity, hiring and inflation.’ And so what this suggests is that to some extent, the turmoil in the banking sector that has unfolded in recent weeks is actually helping the Fed achieve its objectives of loosening slack in the in the US economy and cooling aggregate demand.”
TIM GHRISKEY, SENIOR PORTFOLIO STRATEGIST, INGALLS & SNYDER, NEW YORK
“The Fed has been spooked by Silicon Valley Bank and other banking turmoil. They certainly point to that as a potential depressant on inflation, perhaps helping them do their job without having to raise rates as aggressively.”
“This positive reaction from the market is what you’d expect with a softened tone from the Fed and allowing the banking system setbacks to do their job for them in reducing inflation.”
PAUL NOLTE, SENIOR WEALTH ADVISOR AND MARKET STRATEGIST, MURPHY & SYLVEST WEALTH MANAGEMENT, CHICAGO
“They still are talking about hiking rates. They are not talking about being done here, but the markets are taking it as a pretty dovish statement.”
“They acknowledge the issues with the banking sector, but said, alright they are pretty healthy, not to worry, which is what I would have expected.”
“They haven’t backed away from hiking rates, but the equity markets, and the bond market too, are taking it as a huge positive.”
ASHIS SHAH, CHIEF INVESTMENT OFFICER, GOLDMAN SACHS’ PUBLIC INVESTING BUSINESS, NEW YORK
“Despite the Fed pressing ahead with a 25bps rate hike today, we see considerable uncertainty in the path ahead and would downplay the significance of updated economic and dot plot projections in such a fast-moving environment.
“Going forward, we expect the Fed’s data-dependent framework to be informed by what happens in both the economy and banking sector. It is easier to separate monetary policy from financial stability objectives during liquidity crises but concerns over capital constraints can fast change the economic outlook and blur the divide. Rate cuts have become more conceivable, though not yet our base case given the inflation picture.
“It is difficult to pinpoint where and when further vulnerabilities may unfold, but we think areas that benefited the most from low rates and low inflation may be the most exposed. Big picture, as markets adapt to a higher rate regime, we continue to favor high quality fixed income.
(Compiled by the Global Finance & Markets Breaking News team)
