What has changed at this meeting? Will the Fed pause or continue raising interest rates?

As expected, the Fed raised interest rates by 25 basis points as expected. However, its statement and subsequent Powell press conferences are very different from those before. What has changed at this meeting? Let's take a look at it right away.

First, let's take a look at the changes in this announcement. In its 2:00 ET statement, the Fed began by saying that job growth had picked up in recent months and remained firm. At the same time, it said that inflation remained at a high level. Compared with the previous meeting, it did not mention that "inflation has some signs of cooling down." Therefore, the focus of the first paragraph is to reflect the recent hot economic data, indicating that inflation is still very stubborn.

The statement then referred to the recent banking crisis. First, the U.S. banking system is sound and resilient. It went on to say that recent developments could cause a tightening of credit and affect the economy, but that these effects are far from certain at this point. The committee continues to monitor inflation closely. This also clearly shows that although the banking incident has an impact, controlling inflation is still the Fed's top priority, showing the Fed's determination to the market. Just looking at the first two paragraphs, the argument can be said to be relatively hawkish.

Then, after announcing the decision to raise interest rates by 25 basis points, the statement no longer mentioned "on-going increases" and continued to increase. Instead, the committee will pay close attention to future information and assess the impact on monetary policy. The Committee anticipates that some additional tightening may be appropriate to enable the Fed to achieve its inflation objective. This rhetoric sounds more professional, and a simple translation is: "As for whether to raise interest rates in the future, the Fed needs to look at the future information and evaluate whether there is a need to raise interest rates. If raising interest rates is necessary to control inflation, so the Fed will still raise more.” Relatively speaking, “on-going increases” means that no suspension is currently considered and will continue to increase. The general market interpretation is 2 more than times. This marks an initial turnaround for the Fed. It not only shows that the interest rate hike is basically coming to an end, but also gives myself a certain degree of flexibility, making it clear that decisions are made based on data. If the position changes suddenly, it is also due to data. This part is more dovish. While still hinting at the possibility of further rate hikes in the future, the stance has become flexible.

If you compare the dot plots this time with the previous one, you will find that the terminal interest rate forecast for this year has not changed, and it is still at 5.1%. Not only that, but the overall forecast for 2023 is still hawkish. In December, there were also two officials who believed that the terminal interest rate could be kept below 5%, only one this time. And those who think that the interest rate will get 6% did not have it last time, but this time there is one. As for the forecast for next year and beyond, there are still great differences among officials, so we don't have to think about it. Who knows what will happen at that time. This time the Federal Reserve’s forecasts for GDP growth, unemployment rate and inflation are basically the same as those in December. The data has only deteriorated a little, but the ranges are all around 0.1 and 0.2, not exceeding expectations.

Finally, let's focus on Powell's press conference. This time Powell seemed more restrained. Here are the highlights from Powell's press conference. In the part of the banking crisis, Powell emphasized that the recent events are only a small number of banks, and the entire banking system is still very resilient. The government quickly took effective measures to ensure the liquidity of the system, showing that the deposits of all depositors are safe. But then the reporter asked if that meant all deposits were protected, and Powell said, my answer is my answer. We have enough tools to keep deposits safe. Depositors should believe that their deposits are safe. That is to say, the Federal Reserve and the government will not explicitly say that they want to protect all deposits. They will only provide loans and confidence to ensure that depositors can get their money.

Regarding this decision, Powell said that the committee has considered suspending the interest rate, but the 25 basis point rate hike has been unanimously agreed by everyone. Then he emphasized that if there is no banking incident and just looking at economic data, theoretically the rate hike may be accelerated this time, and the terminal interest rate will be higher, but due to the current uncertainty in the banking sector, this part of the impact is offset. He also pointed out that the banking crisis will tighten credit, which is equivalent to raising interest rates, but it is difficult to judge how many basis points and how long it will last. In other words, the banking crisis helped the Fed, but the subsequent impact still needs attention.

And just as Powell was holding a press conference, U.S. Treasury Secretary Yellen backtracked. Reuters reported that Yellen told members of Congress that the FDIC does not intend to insure all deposits anymore. In the Senate, Yellen said the $250,000 deposit limit would not be raised now, although changes to the current protections would be worth looking into. At present, we will only deal with each case individually to see if it will cause systemic problems. If so, the FDIC will protect all deposits in this bank. Affected by this news, First Republic Bank FRC fell in response, plummeting 15.5%, driving the broader market to dive collectively.

Most of Powell's text is still saying that the banking crisis is not a big problem, but the uncertainty is great, and it is difficult for us to judge the specific impact.Do you think the Fed will pause or continue raising interest rates this year?