Research Reports

The Fed downshifted to a smaller rate hike to start 2023, but the job is far from done. As expected, the Fed raised rates by 25 basis points (bp) today, slowing from the 50bp hike in December, and the 75bp hikes at the four meetings before that. However, the Fed continued to reiterate that ongoing tightening is warranted and repeated the view that the risk to doing too little is greater than the risk of doing too much.

While we have to wait for March to get updated forecasts from the Fed (the dot plots), there were a number of changes to the Fed statement and Powell had plenty to talk about during his press conference.

If you only saw today’s statement announcing the Fed’s move, the primary takeaway would be a shift toward a more dovish tone. Instead of focusing on the factors causing inflation to stay elevated, the Fed introduced new text that inflation pressures have started to ease. And gone is commentary about the ongoing Russian/Ukraine conflict contributing to inflationary pressures, which is now replaced with a note that the conflict is keeping global uncertainty elevated. Finally, with the size of today’s rate hike down to 25bp, text was changed to shift the attention from the pace of hikes to the extent of future hikes. In other words, the Fed’s focus is now on finding the finish line.

Then the press conference started. Chair Powell started dovish stating that it is “gratifying” to see disinflation starting to show in the data, and acknowledging that softening in wage pressures is a positive sign for future inflation, but he then tempered those remarks by reinforcing his belief that there is more work to be done. What has the Fed concerned is that non-housing service inflation remains unusually high. Until this metric turns, the Fed will not feel comfortable claiming victory and backing off.