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Federal Reserve Hikes Key Rate, Signals It’s Almost Done; S&P 500 Rises

The Federal Reserve hiked its key interest rate by a quarter point, keeping up its battle against inflation as the banking panic subsides. But new Fed forecasts point to just one more rate hike as ongoing concerns about bank health complicate policymakers’ plan to hold interest rates higher for longer. The S&P 500 rose slightly after release of the 2 p.m. ET Fed meeting policy statement.


Federal Reserve Meeting Highlights

Wednesday’s rate hike raised the federal funds target range to 4.75%-5%.

New quarterly projections show Federal Reserve policy committee members expect the fed’s key interest rate to end 2023 at 5.1%, implying one further rate hike.

The Fed envisions the benchmark federal funds rate falling to 4.3% by the end of 2024, higher than its 4.1% forecast in December.

Every Fed meeting statement back to March 2022 had indicated a likelihood of “ongoing increases” in the policy rate. However, Wednesday’s statement dropped that language, saying instead that the Fed believes “some additional policy firming may be appropriate.”

The upshot: The Fed is nearly done hiking.

Fed projections trimmed the outlook for economic growth to 0.4% this year from 0.5% in December projections. Now the Fed expects GDP growth of 1.2% in 2024, down from 1.6% in December’s outlook. The unemployment rate is seen rising to 4.5% at the end of 2023 and 4.6% in 2024 vs. 3.6% currently.

Fed Chair Powell’s News Conference

Up until now, Powell and other Federal Reserve officials have stressed that the costs of not hiking enough, which could lead inflation to become entrenched, are much greater than the costs of hiking too much.

If an extended bout of inflation becomes baked into expectations, “this is a very difficult risk to manage,” Powell said on Feb. 1. But if Fed overtightening hits the economy harder than necessary, “we have tools that would work on that.”

Yet the sudden emergence of bank-sector woes could lead Powell to say that the economic risks have become more balanced at his 2:30 p.m. news conference.

Investors will be keen to hear Powell’s view on whether tight bank credit for small business makes a recession more likely, as many economists argue.

Investors also will listen closely for any hint from Powell about a coming change in the Fed’s balance-sheet drawdown, if rate cuts are on the table later in 2023.

Markets Bet On Fed Rate Cuts

After Wednesday’s Federal Reserve meeting policy statement, markets were betting that policymakers will shift from rate hikes to rate cuts this fall. Market pricing points to a year-end federal funds target rate below 4.5%.

That’s a stark change from March 7, when chair Powell’s hawkish testimony before the Senate had markets pricing in a half-point hike at this week’s Fed meeting. At the time, markets expected the Fed’s key rate to reach a range of 5.5%-5.75% by September. Yet two days later, SVB Financial Group started a downward spiral that quickly infected much of the U.S. banking sector.

On Wednesday, PacWest Bancorp (PACW) said its deposits have stabilized in recent days, but not before falling 20% amid the panic started by SVB’s failure. PACW stock fell solidly Wednesday.

S&P 500 Reaction

The S&P 500 rose 0.2% in Wednesday’s stock market action, edging higher after the Fed’s 2 p.m. policy statement. The S&P 500 rallied ahead of the Fed meeting, climbing 1.3% on Tuesday, following Monday’s 0.9% gain that saw the index regain its 200-day moving average.

The 10-year Treasury yield fell 9 basis points to 3.52% after the Fed policy news. Although the 10-year yield has bounced off its bank-crisis lows, it remains far below its near-4% level before SVB’s collapse.

The 2-year Treasury yield, which is more closely tied to the near-term Fed rate outlook, slid 13 basis points to 4.05%.

Investors have been weighing both the outcome of the Fed meeting and whether the banking crisis could turn out to be good news for stocks.

“Arguably, it would be better for the broader stock market if growth slowed because banks became more conservative in their lending than if it slowed because the Fed had to raise rates to over 6%,” BCA Research strategists led by Peter Berezin wrote on March 16.

The economy would slow in either case, BCA wrote. But in a banking-led slowdown, “the discount rate applied to earnings would not be as high,” which would be better for stock valuations. Yet, the analysts acknowledge that growth might not just slow but collapse. That could happen if the Fed keeps policy too tight as credit becomes harder to obtain.

Through Tuesday, the S&P 500 had climbed 11.9% from its bear-market closing low on Oct. 12, but remained 16.55% off its record closing high in January 2022.

Be sure to read IBD’s The Big Picture each day to stay in sync with the market’s underlying trend and what it means for your trading decisions.


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