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Market Update

Fed hikes continue as a pause may be on the horizon

March 22, 2023


Earlier today, the Federal Open Market Committee (FOMC) increased their fed funds target range by 25 basis points to 4.75% - 5.00%. The Committee believes additional increases may be necessary to bring rates to a sufficiently restrictive level. The Federal Reserve will also remain on course with their balance sheet roll off program.

Key takeaways

  • The FOMC voted unanimously to increase the fed funds target range by 25 basis points to 4.75% - 5.00%. Chair Powell also indicated that the Committee’s base case is not cutting rates in 2023.
  • The FOMC is anticipating the target level for the fed funds rate to reach 5.10% by the end of 2023. This is in line with their projection from the December meeting and they anticipate one more hike in 2023.
  • Powell states that recent developments in the banking sector are expected to lead to tighter credit conditions which will in turn lead to less of a need to hike rates. He stated that U.S. bank depositors should be confident that their deposits are safe.
  • The Fed expects core inflation to decrease slowly and released an anticipated path of 3.6% by the end of 2023, 2.6% by the end of 2024, 2.1% by the end of 2025, and then 2.0% after that.

FOMC recap

The FOMC voted unanimously to increase the fed funds target range by 25 basis points to a range of 475-500. After the recent developments in the U.S. banking sector, the Committee is expecting tighter credit conditions for both households and businesses. If this tightening takes effect, the Committee feels confident that further rate hikes may not be required as previously expected. Their goal is to bring inflation to the 2% target, and Chair Powell stated that the Committee aims to keep rates at a restrictive level while also remaining on course with their balance sheet roll off until they are confident that inflation is at their target. Currently, the Committee expects core inflation to reach 2.1% by December 2025. The Committee anticipates one more rate hike necessary in 2023 and plan to hold that rate through the rest of the year. Chair Powell stated that if economic developments follow the Committee’s expectations, then they will not cut rates in 2023.

Impact on rates

After the meeting, rates expectations remained similar to where they were after the February 1, 2023 Fed meeting. The market is currently pricing in a maximum Term SOFR rate of 4.92% in May 2023, and then decrease after that. This is different than the Committee’s 5.10% peak and Powell’s statement of no rate cuts currently priced in for 2023.

As of 4 p.m. ET on March 22, 2023

Also, since the February 1, 2023 meeting, interest rate cap pricing has remained relatively unchanged for shorter dated and lower strike structured caps. But for caps that are impacted heavily by market volatility with longer terms and higher strikes (especially above the forward curve), pricing has increased drastically. This is due to the market volatility from recent events adding more uncertainty for the rate path.

Moving forward

Chair Powell stated that inflation remains sticky. The Committee expects that the combination of cumulative rate increases, balance sheet run off, and tighter credit conditions may help curb inflation. The Committee also does not expect rate cuts for the remainder of 2023, but will remain attentive to economic developments and will react accordingly. Chair Powell also noted that the U.S. banking sector is strong and resilient. The Committee does not expect the bank failures to be widespread, and the swift action by the Federal Reserve and the FDIC helped contain any contagion.

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