The Federal Reserve has raised the interest rate by 0.25% for the second-straight meeting bringing the policy rate to a new range of 4.75% to 5%, the highest since October 2007.
The central bank also signalled that its cycle of interest rate hikes was nearing its end, sending stocks higher.
According to the Fed's updated economic forecasts in its Summary of Economic Projections, interest rates are seen peaking at 5.1% this year, on par with the Fed's previous December projection.
In a statement, the central bank highlighted that inflation remains elevated as recent indicators pointed to modest growth in spending and production, and job gains have picked up in recent months and are running at a robust pace.
It noted that the US banking system was “sound and resilient,” as the sector has recently come under pressure following the collapse of three banks this month.
“Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. The extent of these effects is uncertain,” the Fed said.
Notably, the Fed has done away with language around “ongoing rate increases,” signalling that the end of its rate hiking cycle is in sight.
Instead, the Fed stated: “The Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time.”
Analyst forecasts steady rate cuts in 2024
IG market analyst Chris Beauchamp noted that, after the gyrations in forecasts in recent weeks, the Fed has duly delivered the dovish hike many had expected.
“It was the only sensible move really, given the turmoil in global markets since the failure of Silicon Valley Bank,” he said.
“The dot-plot points towards a steady cut in rates in 2024, and it sends the message that Fed members take the risk of further stress in banks seriously.”
Investors welcomed the Fed’s decision, with the Nasdaq up 0.6%, the S&P 500 up 0.4%, and the Dow Jones up 0.2% shortly following the announcement. Stocks had been flat for much of Wednesday in the lead-up to the rate decision.
“US markets have surged following the statement, reacting enthusiastically, while the dollar is down, but all sides will need to be careful in case a potentially cautious [Fed chair] Powell is misinterpreted as a reason to turn pessimistic once again,” Beauchamp said.
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