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Market Update

A year of Fed interest rate hikes

February 1, 2023


On Wednesday, February 1, 2023, the Federal Open Market Committee (FOMC) increased interest rates by 25 basis points for a target fed funds range of 450–475. This rate increase marks another decrease in size of these rate hikes, but it shows that the Fed continues applying pressure on inflation. The Board noted that they believe ongoing rate increases will be appropriate.

Key takeaways

  • The FOMC raised rates by 25 basis points to a range of 450–475. This marks a full year of consecutive Fed meetings with hikes totaling 4.50%.
  • Chair Powell stated that the Fed is focused on returning inflation to their 2% target and “need to get the job done.”
  • Based on the Fed’s forecasts, they do not believe it will be appropriate to lower rates this year. Chair Powell stated that if inflation decreases faster than they expect, they are open to lowering rates.
  • 1-year cap pricing is currently in line with pricing immediately after the December FOMC meeting, while longer-term caps have fallen in price, reflecting market expectations for steeper rate cuts at the end of 2023 and beyond

FOMC recap

The Federal Open Market Committee voted unanimously to increase the fed funds target range by 25 basis points to a range of 450-475. Chair Jerome Powell noted that the Fed is pleased to see the deflationary process begin, but still has a lot of work to do to ensure that inflation is not entrenched in the economy. The Fed's goal is to bring inflation to the 2% target, and Chair Powell stated that the Board aims to keep rates at a restrictive level until they are confident that it is finished. They also stated that the impact of the rapid fiscal tightening has not been completely felt by the economy due to the natural lag for the policy to work through the economy. Shifting to slower rate hikes will allow the FOMC more time to review the economic impacts of the fiscal policy and change course if needed. While the Board is satisfied seeing the deflationary process begin, they are cautious to not stop the tightening process too early.

Impact on rates

The market’s expectations for future rate movement remain in line with expectations before the meeting. As evidenced by the forward curves below, the market is still pricing in a rate cut toward the end of 2023 and with a slightly steeper rate cut than before.

Since last December’s meeting, pricing on 1-year interest rate caps remains at similar levels. For longer dated interest rate caps, pricing has come in since December due to the slightly lower bottom of the forward expectations.

Moving forward

The Fed made it clear that they plan to continue rate increases until they believe rates are at a sufficiently restrictive level. Their focus is to reduce inflation in the United States and, though inflation has eased, it remains elevated. Chair Powell noted that the Board still has more work to lower inflation, but the deflationary process beginning is promising. The FOMC will remain attentive to economic developments and the impact of their rapid fiscal tightening in 2022 but will remain cautious about declaring victory against inflation.

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