- FOMC lifts key lending rate as expected

- Quarter point move likely to be the last for now

- Powell leaves door open for further action

- Tighter credit conditions help Fed reach neutrality

By Harry Daniels        

LiveSquawk News        

@HarryDaniels71        

4 May 2023 | 10:30 GMT       

In what was a fairly well-trailed event, the Federal Reserve’s rate setters announced what many believed ahead of the announcement to be the 10th and likely peak of the current cycle.  

As widely expected, the FOMC increased its main interest rate by 25 basis points to a range of 5.0-5.25%, in what was a unanimous vote by members.

The ensuing statement omitted the reference to “some additional policy firming may be appropriate”, and in a nod to the regional bank issues noted that, “Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation.” How much they ware expected to weigh was uncertain, the committee said.

Barclays’ Marc Giannoni noted that his team was surprised neither by the decision nor the change in messaging. “We expected the FOMC to indicate that it would likely pause its hiking campaign at the June meeting but that it would maintain a tightening bias, indicating additional rate increases if conditions warrant it.

“We believe today's statement did precisely that.”

Fed watchers said that early on in the press conference, Fed Chair Jerome Powell was asked whether the FOMC statement should be interpreted as signalling a pause at the June meeting. It was a supposition he pushed back on and stated that the decision had not yet been made and would depend on incoming data.

At the outset of the press conference, in light of last week’s regional bank problems and subsequent demise of First Republic Bank, Powell chose to address recent developments in the banking sector and the issue of bank supervision.

He said the Fed was committed to learning the right lessons and offered reassurance that the US banking system was sound and resilient. Noting that conditions in banking sector had broadly improved. A sentence that may yet come back to haunt him.

It should be noted that shares of PacWest fell nearly 60% in after-trading hours on Wednesday as the Californian lender confirmed reports it was considering “strategic options.”

Daiwa’s Lawrence Werther noted that [Powell] did volunteer that tightening in credit conditions for households and businesses stemming from volatility in the banking sector did eliminate the need for additional hikes that may have previously been warranted. “He avoided quantifying the degree of tightening in terms of rate hike equivalents (versus suggesting in the March press conference that it equalled one or two hikes), but he did say that the tightening was an important factor to be considered along with the cumulative shifts in policy already enacted by the Committee.”

Until Wednesday, markets had still priced in more than a fleeting possibility of rate cuts before year end, an outcome Barclays’ Giannoni now posits is very unlikely. “The FOMC remains quite uncertain about the ‘sufficiently restrictive’ level of rates, and thus that it might be marginally more willing to further raise rates if the incoming data suggest this is warranted.

“Powell reinforced this point by arguing that the FOMC would not cut rates if inflation remains elevated or even comes down as slowly as in the Committee's projections.”

However, one thing was clear following the decision, and that is that policymakers are closer to the end of its latest campaign to cool the economy.