The Federal Open Market Committee (FOMC) has lifted the funds rate by a further 25 bps to 5–5.25 per cent, taking the cumulative size of rate hikes since the commencement of the tightening cycle to 500 bps.
In its post-meeting statement, the Fed pointed to a modest expansion in the pace of economic activity, “robust” job gains, and “elevated” inflation.
But notably, the statement took a dovish turn, with the central bank removing a previous reference suggesting “some additional policy firming may be appropriate” to ensure monetary policy is “sufficiently restrictive” to return inflation to the 2 per cent target range.
This comes amid the Fed’s acknowledgement of turmoil in the US banking system and tighter credit conditions.
“The committee will closely monitor incoming information and assess the implications for monetary policy,” the FOMC statement read.
“In determining the extent to which additional policy firming may be appropriate to return inflation to 2 percent over time, the committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”
The Fed said future monetary policy determinations would be influenced by “readings on labour market conditions, inflation pressures and inflation expectations, and financial and international developments”.
“The committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals,” the Fed noted.
According to Stephen Miller, investment strategist at GSFM, the FOMC’s latest statement has paved the way for an “indefinite pause” to the monetary policy cycle.
“The Fed has consistently maintained a ‘higher for longer’ characterisation of the likely policy rate path,” Mr Miller said.
Moreover, bond markets are pricing 40 bps in cuts to the federal funds rate by the end of 2023, with a further 100 bps in cuts in 2024.
But in his address to the media following the FOMC meeting, chair Powell said the board does not anticipate monetary policy easing any time soon, given the forecast for progress towards the inflation target.
“We, on the committee, have a view that inflation is going to come down, not so quickly, but it’ll take some time, and in that world, if that forecast is broadly right, it would not be appropriate and to cut rates, and we won’t cut rates,” he said.
The Fed chair added he personally expects the US economy to avoid a recession, despite broad expectations of a “mild” recession triggered by aggressive monetary policy tightening.
Mr Miller agrees, claiming the bond market projections have often overstated downside risks.
“While there have been some slivers of promising news suggesting that inflation pressures are abating, progress remains grudging at best,” he said.
“And while markets obsess about a potential recession and evidence grows that activity is decelerating, it is a long way from clear that it is doing so in a way that would lead the Fed to contemplate a rapid reversal of policy rate hikes to date.”
The FOMC’s median forecast is for modest GDP growth of 0.5 per cent in 2023, coinciding with an increase in the unemployment rate to 4.6 per cent.
“That is not inconsistent with a shallow recession. That means it will take more than a shallow recession for the Fed to meaningfully change course,” Mr Miller added.
However, banking instability may throw a spanner in the works, potentially leading to a further tightening in credit conditions.
Powell addresses bank takeover
The Fed chair weighed in on the recent collapse of First Republic Bank — the latest US regional bank to fail following a liquidity drain.
First Republic was rescued by US giant JPMorgan, which was selected by the Federal Deposit Insurance Corporation (FDIC) following a competitive bidding process.
When asked if the acquisition would hinder competition in the local banking sector, chair Powell acknowledged the deal was not ideal but was deemed essential to quell financial stability risks.
“I personally have long felt that having small, medium, and large sized banks is a great part of our banking system,” he said.
“…I think it’s healthy to have a range of different kinds of banks doing different things. I think that’s a positive thing.
“…I think it’s probably good policy that we don’t want the largest banks doing big acquisitions [but] this is an exception for a failing bank and I think it’s actually a good outcome for the banking system.”
JPMorgan is set to assume full ownership of First Republic’s deposits, assets, and bank branches (84 branches located in eight US states).
- approximately US$173 billion (AU$260.5 billion) of loans;
- approximately US$30 billion (AU$45 billion) of securities.
- approximately US$92 billion (AU$138.5 billion) of deposits, including US$30 billion (AU$45 billion) of large bank deposits, which will be repaid post-close or eliminated in consolidation.
The FDIC and JPMorgan Chase Bank have also entered into a loss-share transaction on single family, residential, and commercial loans it purchased from First Republic Bank.
The institutions are set to “share in the losses and potential recoveries” on the loans covered by the loss-share agreement.
This aims to “maximise recoveries” on purchased assets by “keeping them in the private sector”, while also minimising disruptions for loan customers.
Additionally, FDIC has pledged to provide $50 billion (AU$75.2 billion) of five-year, fixed-rate term financing.