March Fed rate hike: Sometimes the moments that challenge us the most define us

Executive summary:

• 매우 면밀하게 진행된 결정으로 연준은 3월 22일 기준 금리를 25 bps 인상. (4.75~5.00%),
• 연준은 향후 금리 인상 Guidance를 “some additional policy firming may be appropriate” 라는 표현으로 완화.(2월에는 “ongoing increases will be appropriate”라는 표현을 사용.)
• 연준은 여전히 기준금리 최고치를 5.25%로 제시하며, 추가 1회의  금리 인상을 예고함.  

We learn through observation. I took my son outside for a ride on his balance bike last night. After a couple of minutes on the cycle he was distracted by a leaf blowing in the wind. He picked the leaf up, threw it against the wind and laughed. Then, he picked the leaf up, threw it with the wind, chased it down the street and laughed. I watched this and thought, he’s more likely to be a scientist than an X Games champion. That’s OK with me.

We almost always know what the Fed is going to do on announcement day because the data, or the Federal Open Market Committee (FOMC)’s guidance, or both are crystal clear. We don’t learn a lot from observing those easy decisions. Today was different. The Fed was confronted with a tough decision. It could take a risk with inflation expectations, pause, and wait for more clarity on the ramifications of the turmoil in the banking system. Or it could take a risk with economic growth, continue to hike, and emphasize its commitment to the inflation fight.

Fixed income markets placed an 80% probability on the latter this morning. We anticipated the latter. The Fed chose the latter. That decision matters. While there were important nuances to the guidance around the decision that we will get to, Powell stuck to his guns, reinforcing that the Fed still thinks the risks of letting inflation become entrenched are larger than the risks of tightening too much and causing a recession. Additional observations:

• The federal funds rate was lifted by 25 basis points to a range of 4.75% to 5%.
• The hike was delivered in a delicate manner, with some investors interpreting the full suite of the hike, guidance, and accompanying economic forecasts as a “dovish hike”.
• The statement’s guidance about future rate hikes was softened from “ongoing increases will be appropriate” in February to “some additional policy firming may be appropriate” in March to reflect the uncertainty and risks facing the U.S. economy at present.
• Coming into the meeting, most prominent Wall Street economists thought the peak federal funds rate in the dot plot would move up from 5.25% to 5.5% for 2023. That did not happen. It was left unchanged at 5.25%. Powell said that an expected tightening of credit conditions from the banking turmoil influenced the FOMC’s forecasts for interest rates today. 
• All in all, this suggests the committee has a baseline for only one more rate hike this year.
• Powell noted he remains “strongly committed to returning inflation to target”.

How did markets react to the decision?

Financial markets rallied a bit around the careful rate hike:

• Treasury yields fell moderately across the curve, with larger moves down at shorter maturities
• The Treasury yield curve became less inverted as a consequence
• Equities—as measured by the S&P 500 Index—were volatile in the wake of the decision.

The bottom line: Recession risks remain elevated

1982년 이래 가장 공격적인 금리인상과 긴축적인 금융정책으로 인해서, 러셀의 미국에 대한 경기 전망은 여전히 조심스러움.