Economist: Projections Show Dissent at Fed About Backing Off Interest Rate Hikes After Bank Failures
20:22 GMT 22.03.2023 (Updated: 20:32 GMT 22.03.2023)
© AP Photo / Andrew Harnik
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At its March meeting on Wednesday, the Federal Reserve’s Open Market Committee (FOMC) decided on an interest rate increase of 25 basis points - smaller than many expected, given recent comments by the central bank’s chairman, Jerome Powell. The increase brings the effective federal funds rate (EFFR) to 5%.
Michael R. Englund, principal director and chief economist for Action Economics, told Sputnik on Wednesday that the recent collapse of two large US banks, Silicon Valley Bank and Signature Bank, had likely moderated the Fed’s hand.
“Of greatest interest to the market was the change in the wording of the policy statement regarding future tightening, as the statement now shows that ‘the Committee anticipates that some additional policy firming may be appropriate,’ rather than the ‘ongoing increases in the target range will be appropriate.’ This downgrade in guidance leaves open the potential for rates to pause at current levels, though it leaves the door open for either one or two hikes as the market had expected before last week’s banking news,” he explained.
“The statement also indicated the banking system is ‘sound and resilient,’ and added that ‘tighter credit conditions’ are likely to weigh on economic activity. This would leave the Fed room to view the tightening in credit conditions as sufficient to combat inflation without the need for further rate increases at the May or June meetings,” Englund added.
The expert further noted that the FOMC had altered its inflation outlook, saying it “remains elevated.” Last month, it said "inflation has eased somewhat but remains elevated," which implied an increase in fears about inflation.
21 March 2023, 15:11 GMT
Turning to the Fed’s summary of economic projections (SEP), Englund said its forecast revisions “surprisingly” showed a downward revision for gross domestic product (GDP) forecasts for 2023 and 2024 and slight downward revisions of the jobless rate forecasts, which ran contrary to macro data seen since the FOMC’s December meeting. However, 2025 GDP forecasts improved.
For the FOMC forecast revisions in the SEP, the forecasts surprisingly show downward revision for GDP forecasts in 2023 and 2024, despite strength in macro data since the December FOMC meeting, though we saw a slight boost in the 2025 GDP forecasts.
“The headline PCE [personal consumption expenditure] chain price forecasts were raised sharply in 2023, as the Fed doubled-down on its inflation pessimism from the December meeting, though 2024-25 forecasts were left largely intact,” he noted. “Our own 2023 chain price forecast of 2.9% lies fully below the new central tendency of 3.0%-3.8% (was 2.9%-3.5%). The core inflation forecasts also showed upward 2023 revisions followed by nearly unchanged 2024-25 forecasts, and the new central tendency of 3.5%-3.9% (was 3.2%-3.7%) is skewed above our own 3.5% estimate.”
15 March 2023, 15:24 GMT
“The FOMC’s dot plot revisions revealed only a slight upward shift in the Fed funds rate estimates in 2023 and 2024, but no revisions in 2025, alongside a slight boost in the longer-run Fed funds rate assumptions. The medians revealed no change for the Fed funds rate in 2023 at 5.1%, a boost to 4.3% from 4.1% in 2024, and no change in 2025 at 3.1%.”
Englund said that projections for the EFFR were skewed upward from the median, suggesting dissent among the FOMC about whether or not to increase interest rates by one or two more 25-point hikes.
“The future central tendencies for the Fed funds rate sit at 3.9%-5.1% (was 3.9%-4.9%) in 2024 and 2.9%-3.9% (was 2.6%-3.9%) in 2025. The full range of Fed funds estimates show a high-end rate of 5.9% (was 5.6%) at the end of 2023, following by unrevised 5.6% rates in 2024 and 2025, which reflects that at least one policymaker anticipates a prolonged Fed fight against inflation.”
Financial and political commentator Tom Luongo told Sputnik he was “not surprised at all by the FOMC decision. It was right in line with market expectations of 25 basis points. It was also the right thing to do.”
“Powell had to give the economy a vote of confidence by saying recent turmoil was not a threat, that the economy could handle it,” he explained.
“The big shock was his refusing to back down on shrinking the balance sheet. Again, this was the right decision. The markets have to become convinced Powell is serious about not being like his predecessors [Alan] Greenspan, [Ben] Bernanke and [Janet] Yellen,” Luongo said.
The commentator said the Fed put, or the market belief that the Fed would step in and implement policies to limit the stock market's decline beyond a certain point, “is officially dead.”
“[A]nd now, thanks to the way Powell handles SVB and Credit Suisse, the interest rate and credit risks of a stronger dollar are squarely the problems of the international markets, not the US markets,” Luongo said. “This paves the way for more quarter point hikes this year while the balance sheet shrinks.”
