As expected, the Fed hiked the fed funds rate by 25bps on Wednesday to a target range of 5.00% to 5.25%.  But the focus was on the Fed’s statement, with market participants anticipating the Fed to pause on hiking rates any further.  The FOMC removed a line from their previous statement that said the committee “anticipates that some additional policy firming may be appropriate” and now states they will consider various factors “in determining the extent to which additional policy firming may be appropriate.” 

While this was not as dovish as many investors had hoped, it did hint at a possible pause from the Fed.  At his press conference Powell said the decision on a pause was not made today, but it was a meaningful change to no longer say the committee anticipates further tightening.

When asked about future rate cuts, Powell suggested inflation will remain heightened for an extended period –

“We on the committee have a view that inflation is going to come down not so quickly, that it will take some time. And in that world, if that forecast is broadly right, it would not be appropriate to cut rates and we will not cut rates.”

Based on the last Summary of Economic Projections released by the FOMC in March, the median peak rate anticipated by the committee was 5.00% to 5.25%, which we are now at.

2 and 10 Year Treasuries

Source for Charts: Bloomberg

Overall, the Fed appears to have threaded the needle this meeting.  They were able to hike rates an additional 25bps while allowing flexibility in determining whether further tightening is appropriate.  Instead of outright saying this tightening cycle is over, as much of the market believes is the case, they were able to give themselves the option to tighten conditions further if inflation remains high.  

Market reaction was fairly muted given there were no surprises from the announcement.  Treasuries were little changed, and traders are still pricing in just over 3 rate cuts by the end of the year (no more hikes).