The Federal Reserve raised interest rates by 25 basis points, lifting the benchmark fed funds rate to a range of 4.75 percent and 5 percent, the highest since late 2007.
Fed officials say that the “banking system is “sound and resilient,” adding that the recent developments “are likely to result in tighter conditions for households and businesses,” which could weigh on economic activity, hiring, and inflation levels.
“The extent of these effects is uncertain. The Committee remains highly attentive to inflation risks,” the FOMC said in a statement.
Fed projections show that there will be one more quarter-point rate hike this year and cuts totaling 75 basis points in 2024.
According to the Survey of Economic Projections (SEP), the fed funds rate is expected to be 4.3 percent next year, up from the previous December estimate of 4.1 percent. Officials see the policy rate at 3.1 percent, unchanged from December. The longer-run rate also stayed the same at 2.5 percent.
Although the balance sheet has experienced an expansion over the last week, the rate-setting Committee confirmed that it will continue reducing its holdings of Treasury securities, mortgage-backed securities, and agency debt.
Since the start of the banking crisis, only a small number of economists and prominent market personalities have suggested that the Fed needed to slash interest rates to support the financial system.
In response to a tweet by billionaire hedge fund manager Bill Ackman who said the central bank needed to pause, Tesla Motors and Twitter CEO Elon Musk advocated for a cut.
“Fed needs to drop the rate by at least 50bps on Wednesday,” Musk said on Monday.
Only one bank had supported Musk’s assertion: Nomura Securities.
Nomura economists had anticipated that the Fed would cut its benchmark interest rate by a quarter-point and suspend the reduction in the size of its $8.6 trillion balance sheet.
The Fed should begin cutting interest rates immediately, says Bryce Doty, the senior vice president and senior portfolio manager at Sit Investment Associates.
“The Fed can cut rates and immediately reverse some of the damage,” Doty wrote in a note on Monday, adding that many of today’s challenges could have been avoided if the Fed recognized inflation earlier.
“Instead of raising rates slowly and cease printing trillions of dollars when the economy first reopened, the Fed didn’t begin raising rates until a year ago after year-over-year inflation had surpassed 7%,” he said.
Some experts have argued that the Fed no longer needs to be aggressive in the current hiking cycle, alluding to slowing inflation.
In February, the consumer price index (CPI) eased to 6 percent, and the core CPI slowed to 5.5 percent.
Despite widespread liquidity fears that could threaten the banking system, the futures market sees the central bank letting up on its quantitative tightening campaign in December, according to the CME FedWatch Tool.
However, some economists present the case that the Fed has potentially started slowing down its tightening, citing the dramatic increase in the balance sheet. The Fed’s balance sheet for the week ending March 16 increased nearly $300 billion to just under $8.64 trillion.