This commentary is written by PNC Chief Economist Gus Faucher.
- The FOMC raised the fed funds rate about 25 basis points, as expected.
- The statement noted said the bank system is “sound and resilient,” which acknowledging recent problems.
- PNC expects the FOMC to raise the fed funds rate by another 25 basis points at its early-May meeting.
- PNC also expects a mild recession starting in the second half of this year.
- The dot plot was little changed from December, although expected growth next year was lower.
The Federal Open Market Committee raised the federal funds rate by 25 basis points to a range of 4.75% to 5.00%. The statement also said that “some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficient restricted to return inflation to 2% over time,” indicating that further near-term rate hikes are likely.
There had been some uncertainty as to whether the FOMC would raise the fed funds rate or keep it unchanged because of recent concerns about the stability of the banking system. The FOMC statement called the U.S. banking system “strong and resilient.” The statement also said that these banking problems are likely to result in tighter credit conditions, but the extent of the impact is unknown. The statement reiterated that the FOMC “remains highly attentive to inflation risks.”
Today’s FOMC announcement was largely as expected. After tightening monetary policy very aggressively in 2022 to combat inflation well above the 2% objective, the FOMC has been less aggressive in 2023. The rapid increases in interest rates has contributed to the recent failures of three banks. But concern about the financial system did not deter the FOMC from raising the fed funds rate, although by only one-quarter of a percentage point. Before the bank failures earlier this month, fed funds futures markets had been pricing in a 50 basis point rate increase.
Committee members remain concerned that letting up on rate hikes now could result in inflation persistently above 2% over the next few years, which would require even more tightening in monetary policy over the longer run. The FOMC appears to think that it has the tools to both cool inflation with higher rates and support financial system stability.
PNC expects the FOMC to raise the federal funds rate by 25 basis points at its next meeting, on May 3, and then maintain the rate in a range of 5.00% to 5.25% as it becomes more apparent that economic growth is slowing and inflation is receding. Given the lagged impact of the ongoing tightening cycle, including the problems in the banking system, PNC expects a mild recession starting in the second half of 2023.
In its discussion of current economic conditions, the statement noted modest economic growth, a strong labor market, and high inflation.
The statement was approved unanimously.
This meeting also included the release of the Summary of Economic Projections, or “dot plot,” which shows FOMC participants’ expectations for the outlook. The median participant expects the fed funds rate to be 5.1% at the end of this year, the same as in the previous projections, from December. But the median projection for the fed funds rate at the end of 2024 is now 4.3%, up from 4.1% in December. The outlooks for inflation and the unemployment rate over the next few years are little changed from December. But the median projection for GDP growth in 2024 has been moved lower, to 1.2%, from 1.6% in the previous dot plot.