Yesterday's Fed decision in plain English

The Fed’s statement speaks of modest growth in spending and production, with job gains increasing at a robust pace and a low unemployment rate. However, inflation remains elevated according to their analysis.

According to the central bank, the US banking system is sound, but recent developments may result in tighter credit conditions moving forward. These tightening conditions may potentially affect economic activity, hiring, and inflation. This development may also impact the trajectory of monetary policy as this level of tightening credit conditions have a similar impact as a large Fed rate hike. That is to say, if banks are lending less and at less favorable rates, that is likely to slow economic activity and may help to slow inflation similar to tighter Fed policy.

The FOMC raised the target range for the federal funds rate to a range of 4.75% to 5%, seeking to achieve maximum employment and a long-term inflation rate of 2%. It was also decided to keep running off the balance sheet at a rate of up to $95 billion per month, or $60 billion in Treasuries and $35 billion in mortgage-backed securities. The door was left open for at least one or two additional hikes, but the language changed to be less certain about policy trajectory.

Chair Powell did his best to clarify that the Bank Term Funding Program was created to help liquefy banks with safe and liquid assets, and is not meant to be stimulus or seen as anything more than a temporary lending program. One that is currently set to expire after a year of its creation. He also said that the Committee does not expect any rate cuts this year.

The Committee anticipates “additional policy firming” to return inflation to the desired level and will closely monitor incoming information and assess implications for monetary policy. This additional policy firming was clarified to be directly referring to the fed funds rate during the press Q&A session.

For the stock market, this rate hike may result in short-term volatility as investors adjust their expectations. In the long run, the tightening of monetary policy could lead to slower economic growth and affect stock prices negatively. However, the FOMC's commitment to returning inflation to 2% may provide stability in the market and the broader economy.

The Committee will monitor incoming information to assess the economic outlook and adjust the stance of monetary policy as needed to achieve its goals. It will consider labor market conditions, inflation pressures and expectations, and financial and international developments in its assessments.

The FOMC also released their updated dot plot, which was unchanged for 2023, rose to 4.3% for the end of 2024, and a longer term rate of 2.5%.

In summary, the mantra “higher for longer” was honored by the Committee, ensuring that the market was informed regarding the potential for monetary policy to stay at higher rates and elevated for some time to come, accompanied by a balance sheet run off that’s set to continue despite some recent bank lending that increased it.

While the market doesn’t quite believe this Fed, pricing in the first cuts as early as July of 2023, and with a bond market reaction that some are saying illustrates that the Fed has already reached their terminal rate, this is a market and economy where data and the narrative that follows it both shift quickly. Meaning expectations may change in the days, weeks, and months ahead.

For now we view the Fed’s decision as one that honors their commitment to fight inflation, while showing some sensitivity to the banking situation and articulating how they’ve attempted to ring fence those risks without pivoting to an easing posture.