The Fed raised interest rates by 25 basis points and Powell warned that "there will be no rate cuts this year."

Original Title: "Fed Raises Interest Rates by 25 Basis Points, Powell Warns 'No Rate Cuts This Year'"

Original Author: Mary Liu, BitpushNews

On the afternoon of March 22nd, New York time, the Federal Reserve announced that it would raise the benchmark federal funds rate by 25 basis points to a target range of 4.75%-5%, which was consistent with the estimates of most market participants.

In its statement from the Federal Open Market Committee (FOMC), the Federal Reserve acknowledged the potential risks caused by the banking crisis this month, stating that "recent developments may restrain household and business credit conditions and put pressure on economic activity, employment, and inflation," implying that there may only be one more interest rate hike this year.

After the interest rate statement was released, Bitcoin (BTC) briefly rose by about $250 to $28,700, while the S&P 500 index rose 0.2% and the Nasdaq 100 index rose 0.7%. However, after Powell's press conference, the stock and crypto markets quickly reversed course. The Dow Jones Industrial Average closed down 1.63%, the S&P 500 index fell 1.65%, and the Nasdaq Composite Index fell 1.6%, closing at 11,669.96 points. Bitcoin fell below $27,000, with a 24-hour drop of 4%, and Ethereum fell to $1,726.

FOMC Statement Highlights

This FOMC statement has undergone some significant changes, including the policy rate shifting from "continuing to increase" to "some additional tightening," as well as "the US banking system being sound and resilient." The following are the main points of the statement:

The Federal Open Market Committee voted unanimously to raise the benchmark interest rate by 25 basis points, reaching the target range of 4.75%-5%. This is the second consecutive time of such a scale of rate hike, following a 50 basis point increase in December last year and four consecutive rate hikes of 75 basis points before that.

The "dot plot" of interest rate forecasts shows that the median estimate for the interest rate level at the end of 2023 is 5.1%, which is unchanged from the level updated in December; the forecast for the end of 2024 has risen from 4.1% to 4.3%.

The statement said that the FOMC "expects that some additional policy tightening may be appropriate," removing the previous wording of "continuing to increase."

The Federal Reserve stated that the US banking system is "sound and resilient", but financial turmoil "may lead to tightening credit conditions for households and businesses, and create some uncertainty pressure on economic activity, employment, and inflation."

The wording stating that inflation has already eased has been removed and replaced with "it is still high".

Continue to shrink the balance sheet (also known as quantitative tightening QT), reserve a monthly limit of $60 billion for US Treasury bonds that will mature without the need for reinvestment, and reserve a limit of $35 billion for mortgage-backed securities. The speed of QT remains unchanged and is in line with expectations.

Economic Forecast: Economic growth for this year and next year has been downgraded, despite a slight decrease in unemployment rate this year. Inflation forecast for 2023 has been slightly increased. In contrast to the reduced concerns about inflation, the number of decision-makers who believe that the economy is facing downside risks remains at a historical high.

Interest rate hike is coming to an end, but "there will be no rate cut" this year

If the Federal Reserve's forecast of 5.1% in 2023 is confirmed, there may be at most one more rate hike (25 basis points) this year.

The Chairman of the Federal Reserve, Jerome Powell, stated at a press conference after the interest rate decision that the Federal Open Market Committee had considered pausing rate hikes due to the banking crisis, but ultimately approved the hike unanimously due to strong mid-term inflation data and labor market. He said, "We are committed to restoring price stability, and all evidence suggests that the public has confidence that we will do so. Over time, this will bring the inflation rate down to 2%. It is important that we use action and words to maintain this confidence."

However, Powell emphasized that if the market expects a rate cut later this year, it is wrong. The economic forecast summary released by the central bank on Wednesday predicts a slowdown in growth, gradual decline in inflation, and a rebalancing of the labor market supply and demand. He said, "In the most likely scenario, if this happens, policymakers did not see a rate cut this year."

Powell added that the economic outlook may be "uncertain," but raising interest rates is currently not within the central bank's "baseline expectations."

Bloomberg Economics' US team said, "The Federal Reserve weighed the pros and cons of waiting and continuing to raise interest rates, and chose the latter. This marks an unconditional commitment to the price stability part of the Fed's dual mandate, and we believe they made the right decision."

Powell expects the future credit environment to tighten, stating that "some additional policy tightening may be appropriate."

Powell mentioned the collapse of regional banks such as Silicon Valley Bank, and acknowledged that recent events in the banking system could lead to a tightening of credit conditions.

According to previous reports by NPR, regulatory agencies of the Federal Reserve had identified risk management issues in Silicon Valley Bank years ago, but the problems were not corrected. The California-based bank had to be taken over by the US government after experiencing a massive bank run. Michael Barr, the vice chairman responsible for regulatory oversight at the Federal Reserve, is leading a review and has promised to submit a report before May 1st.

Powell pointed out: "It is too early to determine the extent of these impacts and how monetary policy should respond. Therefore, we no longer state that we expect continued rate hikes to be appropriate for quelling inflation. Instead, we now anticipate that some additional policy tightening may be appropriate."

The Federal Reserve will closely monitor the upcoming data release and assess the actual and expected impact of tightening credit conditions on economic activity, labor market, and inflation, in order to provide information for its policy decisions.

Tightening credit conditions, such as rising interest rates, can lead to a slowdown in economic growth, as credit is the lubricant for the operation of small and medium-sized enterprises and the lubricant for the overall economic operation. As of the end of February, an indicator derived from the 3-month and 10-year US Treasury bond yield spread used by the New York Fed showed a 55% chance of economic contraction in the next 12 months. However, Powell said there is still a "way" to a soft landing for the US economy, saying, "I still believe that there is a way to [soft landing], and of course, we are working hard to find it."

Industry insiders' opinions

Amid the Fed's interest rate hike, there is uncertainty about the health of the global banking industry. Earlier this month, Silicon Valley Bank and Signature Bank collapsed, and UBS acquired its competitor Swiss Credit - a move forced by Swiss regulators to support the country's banking industry. Jefferies economist Thomas Simons said in a report that the Fed's action today is consistent with our long-held view that the Fed will raise interest rates to 5.125% and pause for a while, unless there is an increase in contagion risk within the banking industry. We expect the Fed to face very similar policy decisions in May, and they will be forced to raise interest rates again unless the contagion risk within the banking industry increases.

Analysts believe that Powell's comments at the post-meeting press conference were more hawkish than expected by the market. Michael Safai, co-founder of the cryptocurrency trading company Dexterity Capital, said: "People hoped that the Fed's dovish tone would eventually come in this banking crisis, but Powell said that as long as the situation remains stable, interest rate hikes may continue. These hopes were dashed, weakening some of the recent momentum that led the cryptocurrency market to rise in recent days."

Despite the latest Fed forecast of only one rate hike this year, Powell said at the press conference that the struggle against inflation is far from over. Matthew Hornbach, head of global macro strategy at Morgan Stanley, commented on Bloomberg TV: "What impressed me is how they balance financial stability with concerns about sticky inflation. The way they do this is by telling people that they will reduce the magnitude of rate hikes but delay rate cuts, which seems like a fairly rational decision. I think the market should "breathe a sigh of relief," and the bond market will find it difficult to shake off the rate cuts already absorbed for the rest of the year."

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