March Fed Rate Hike: Sometimes the Moments That Challenge Us the Most Define Us
- In a closely watched decision, the Fed lifted its benchmark lending rate by 25 basis points to a range of 4.75% to 5% at the conclusion of its March policy meeting.
- The Fed softened its guidance around future rate hikes, noting in a statement that “some additional policy firming may be appropriate.” This is a change from the wording used in February’s statement, when it noted that “ongoing increases will be appropriate.”
- The Fed’s projected peak federal funds rate was left unchanged at 5.25%. This suggests the committee has a baseline for only one more rate hike this year.
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: