The Weekly Bottom Line

Our summary of recent economic events and what to expect in the weeks ahead.

Date Published: March 24, 2023


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  • The Federal Reserve delivered a modest 25-basis point hike this week amid banking stress, lifting the policy rate to a range of 4.75-5.00% – a level that’s just a hair below its previous peak back in 2007. 
  • Fed projections show the policy rate peaking at 5.1% in 2023, implying one more hike for the year, while next year a series of cuts are forecast to bring the rate down to 4.3%. Market expectations, however, are titled toward a lower rate environment in both years.   
  • Existing home sales rose 14.5% in February, recording the first increase after twelve consecutive months of declines. 

Fed Delivers Small Hike Amid Banking Stress

Chart 1 shows the Fed's December 2022 and March 2023 projections for economic growth and core inflation at the end of 2023, 2024 and 2025 expressed in year-on-year terms. The differences between the two sets of projections are minor, expect for a 40-basis point downgrade to GDP growth in the fourth quarter of 2024 to 1.2%.

Stuck between a rock and a hard place, the Fed appears to have taken a middle-of-the-road approach in setting monetary policy this week. Inflation, which remains well above target and has shown moderate signs of acceleration recently coupled with strong job growth, meant that the Fed could have opted for a more hawkish stance at Wednesday’s FOMC meeting. Fed Chair Powell nodded to this possibility in his testimony to Congress two weeks ago. However, the ongoing banking turmoil has upended this narrative. Instead of leaving the rate unchanged, – an option that was closely considered – Fed officials ultimately went with a 25-basis point hike, lifting the policy rate to 4.75-to-5.00%. 

In taking this decision, the Fed acknowledged the risks from the banking turmoil, including the potential negative impact on the real economy from tighter credit conditions for households and businesses. Tighter credit conditions could do some of the Fed’s work for it in reducing inflationary pressures, substituting for further hikes. However, as Chair Powell noted in the press conference, it’s not clear how significant and how sustained the credit tightening will be. The Fed is keeping the door open to some further monetary tightening for now, but changes in the language of the FOMC statement suggest that it is very close to wrapping up its hiking cycle.

Along with the policy decision, the Fed also issued an update to its quarterly economic projections. Fed officials now expect inflation to remain slightly higher by the end of 2023 and 2024 compared to their view in December. Meanwhile, economic growth is expected to come in a bit softer over this same period, with a downgrade to the 2024 growth profile the most noticeable difference (Chart 1).  

Chart 2 the Federal Fund Rate projections by the end of 2023 and 2024 from three different sources: Fed projections, TD Economics projections and market expectations. The Fed expect the rate to peak to 5.1% this year, while falling to 4.3% by the end of 2024. Market expectations are lower for both periods at respectively 3.9% and 2.9%. The TD economics forecast is aligned more closely with the Fed this year, but in 2024 it is more aligned with market expectations.

Policy rate expectations remained unchanged for 2023, with most Fed officials expecting the rate to peak to 5.1%, which implies one more hike this year. Market expectations, however, are not in tune with this view. The current pricing suggests that the Fed is done hiking rates, and that rate “cuts” will follow suit shortly this summer. Moving on to next year, while Fed officials have penciled in a series of rates cuts that will bring the policy rate down to 4.3%, market expectations remain more dovish, with the gap between the two forecasts widening (Chart 2). Our projection is aligned more closely with the Fed this year, but as growth slows into next year, we anticipate that in 2024 the Fed will loosen monetary policy  more than it projects to steady the economic ship. 

Reiterating Chair Powell’s view, the degree of credit tightening from the recent banking turmoil remains a major source of uncertainty for the outlook. On this front, it appears that authorities will need to stay alert in putting out more fires. Across the Atlantic, after finding a solution to the Credit Suisse troubles, the attention has now turned to another Global Systemically Important Bank (G-SIB), Deutsche Bank, after a surge this week in the cost of insuring the lender’s debt against default. With banking developments front and center, economic data played second fiddle, but a strong housing report (see here) did bring some cheer.

Admir Kolaj, Economist | 416-944-6318