The Federal Reserve raised short-term interest rates Wednesday by 25 basis points, as expected. That brings the Fed’s benchmark interest rate to a range of 4.50% to 4.75%, the highest level since October 2007.
After a pullback on the news and the Fed’s press release, the stock market advanced because in his press conference Fed chair Jerome Powell didn’t strongly push back on questions suggesting that the Fed sees inflation continuing to fall and that the central bank is nearing a pause in its interest rate increases.
If you’re familiar with the way that financial markets torture the Fed’s frequently opaque language to support the current consensus, you won’t be surprised that today’s move up on stocks is based on a very minor shift in the Fed’s language.
Today the Fed said that the “extent of future increases” in interest rates will depend on a number of factors including cumulative tightening of monetary policy. The Fed had previously stated that the “pace” of future increases was tied to those factors.
Right now here are the odds on the Fed’s interest rate moves at its March 22 and May 3 meetings, according to the CME FedWatch tool. Prices in the FedFunds future market point to another 25 basis point interest rate increase in March with 88.3% seeing a boost. The odds of a May 3 move look to be tilted, however, toward a pause. The CME tool puts the odds of no change in rates at that Fed meeting at 52.8% and at 39.7% for another 25 basis point increase.
After hitting a 40-year high in 2022, the Fed’s preferred measure of inflation, the core personal consumption expenditures index (which excludes food and energy prices), rose at an annual rate of 4.4% in December, down from the 4.7% annual rate in November.
That’s still a long way north of the Fed’s 2% inflation target. But since interest rate increases work to slow the economy and lower prices with a considerable lag, the problem facing the Fed is to what degree will past interest rate increases work to slow the future economy.
