U.S. FOMC Meeting (May 2-3, 2023)

FOMC hikes policy rate by 25 basis points, cautions on outlook

• The Federal Reserve Open Market Committee (FOMC) lifted the federal funds rate by 25 basis points, to the 5.0% to 5.25% range and announced a continuation of its balance sheet runoff. 
• The Fed maintained its language on the current banking stress stating, "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 Fed dropped its language on anticipating "that some additional policy firming may be appropriate", but maintained that "the Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals."
• All of the members of the FOMC voted in favor of the decision.

Key Implications

• Is this the end? That was the question going into today's announcement. With the Fed dropping its language on the need for more hikes, it signaled that it is moving to a meeting-by-meeting approach. This leaves its options open going forward. Don’t be surprised if Chair Powell tries to keep the door open to more rate hikes at his presser, should the recent momentum in consumer spending and the pass-through to services inflation continue.
• Although the Fed's statement keeps the door open to further hikes, markets think that the Fed is done. The knee-jerk reaction to the announcement was a drop in Treasury yields and a depreciation in the U.S. Dollar. Markets are looking for the Fed to remain on hold through the summer before starting to cut rates as early as September. Approximately 75 bps in cuts are priced in over the back half of 2023. Although we too think the Fed is likely done with further rate hikes, we think September is too early for cuts. Given the lagged effects of the Fed's past rate hikes and recent tightening in financial conditions, we think rate cuts are more likely to start at the very end of 2023 or early 2024.    

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