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United States Monetary Policy March 2023

United States: Fed hikes by 25 basis points in March

At the meeting on 21–22 March, the Federal Open Market Committee (FOMC) increased the target range for the federal funds rate by 25 basis points to 4.75%–5.00%.

The decision to continue hiking was aimed at containing inflation that was still triple the Fed’s 2.0% target in February. The Fed was also looking to cool the hot labor market; the unemployment rate is low and job gains beat market expectations in January and February. The decision came despite the recent collapse of two regional banks, with the Fed describing the banking system as “sound and resilient”.

Forward guidance grew more dovish, with the Fed stating that “some additional policy firming may be appropriate”, compared to February’s statement that “ongoing increases in the target range will be appropriate”. Recent banking-sector instability could lead to tighter credit conditions and dampen activity, thus tempering inflation and reducing the need for more hikes. The Consensus among our analysts is for the upper bound of the target range to peak at around 5.25% in the middle of the year, before falling back slightly by year-end. However, there are important differences among panelists as projections for the end-2023 policy rate upper bound range from 3.75–6.00%. Much will depend on the degree to which financial conditions tighten in the wake of recent bank collapses and whether further banks get into trouble.

Commenting on the meeting, Nomura analysts said:

“Although Chair Powell maintained a distinction between macroeconomic objectives (i.e., price stability) and financial stability, he acknowledged that ‘what’s happening among banks’ ‘substitutes for rate hikes.’ In our recent note, we argue that potential tightening of banks’ lending standards could have a material impact on the economy, rendering further rate hikes unnecessary. […] We maintain our view that the Fed has already reached the terminal rate policy rate.”

In contrast, Goldman Sachs analysts are more hawkish:

“While we […] think that the pressure on banks has raised the odds of a more serious downside scenario, our baseline economic forecast is stronger than the FOMCs. We have left our forecast for the peak funds rate unchanged at 5.25-5.5% and now expect additional 25bp rate hikes in May and June.”

The next monetary policy meeting is scheduled on 2–3 May.

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