Fed Raises Rates as Expected, Stocks Tumble

Fed Chairman Jerome Powell emphasized that the Fed is monitoring the impact of recent banking events but is still committed to reducing inflation to 2%.


The Federal Reserve Open Market Committee on Wednesday announced it would be raising rates by 25 basis points, from 4.75% to 5%. The announcement sent stocks down on the day, with indexes closing off between 1.6% and more than 2.8%.

Fed Chairman Jerome Powell strongly emphasized the Fed’s commitment to reducing inflation to 2%. During today’s press conference, Powell said that, “We will do enough to bring inflation down to 2%. Nobody should doubt that.”

The process of getting inflation back down to 2% has a long way to go and is likely to be bumpy,” Powell said.

Powell also acknowledged in a statement that “in the past two weeks, serious difficulties at a small number of banks have emerged.” In the Fed’s FOMC statement, it said that “recent developments,” referring to the same banking failures, can tighten access to credit. The Fed announced it will be monitoring these developments and their impact on inflation and other metrics when considering future rate increases.

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The FOMC statement also reiterated that, “The Committee is strongly committed to returning inflation to its 2% objective.”

At today’s press conference, Powell said government spending is not a large driver of inflation today, as it was during the pandemic. But in any case, Powell said  he does not give advice to fiscal policymakers, and fiscal policy is something that he has to take as it comes at him.

John Lowell, a partner at October Three, an actuarial consulting firm, says, “If I were a pension sponsor right now, I don’t think I would be making any changes,” because many other market actors saw this coming and had already accounted for it. Lowell explained that increased rates generally are not good for investment returns, bonds especially, but 25 bps—which most market watchers anticipated—should not change anything drastically. He added that he would be far more concerned about the recent banking failures.

Jan Szilagyi, CEO and co-founder of Toggle, an AI-powered market analytics platform, agrees that the Fed’s move is not a big shock to markets, but it does establish that the Fed is still clearly in “inflation-fighting” mode. By “staying the course,” the Fed is also signaling that “there isn’t something ominous the Fed knows that markets may not be aware of.”

 

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