Fed delivers fourth 75 bp hike, signals scale-back coming

NEW YORK (Reuters) - The Federal Reserve on Wednesday raised interest rates by three-quarters of a percentage point as it continued to battle the worst outbreak of inflation in 40 years, but signaled future increases in borrowing costs could be made in smaller steps to account for the "cumulative tightening of monetary policy" it has enacted so far.

The policy decision set the target federal funds rate in a range between 3.75% and 4.00%, the highest since early 2008. The U.S. central bank has raised rates at its last six meetings beginning in March, marking the fastest round of rate increases since former Fed Chair Paul Volcker's fight to control inflation in the 1970s and 1980s.

In a press conference after the meeting Fed Chair Jerome Powell cautioned against any sense the central bank will soon move to the sidelines. "It is very premature to be thinking about pausing" on the effort to lift the federal funds target rate, he said.



STOCKS: The S&P 500 briefly turned higher, then lost 38.15 points, or 0.99%, to 3,817.95

BONDS: Benchmark 10-year note yields initially fell then rose to 4.0484%, vs 4.052% late on Tuesday. The 2-year note yield likewise turned higher to 4.5552%, vs Tuesday's 4.541%.

FOREX: The euro turned 0.36% lower as the dollar rose



"The tone of Fed Chair Jay Powell’s comments was quite hawkish, which means the Fed still has a way to go to fight inflation, and the level of interest rates will be higher than previously expected. There were no hints of dovishness to indicate the Fed may be poised to pause. However, the key sentence in the FOMC comments is the one that states the Fed will consider the cumulative tightening of monetary policy, which is code for saying there has been a great deal of tightening of financial conditions already this year. This statement clearly suggests input from Vice Chair Brainard and opens the door for the Fed to slow down the pace of future rate hikes. However, it doesn’t end them. Monetary policy today is not sufficiently tight enough. We’ll know when the Fed is done tightening; they’ll tell us by simply saying that monetary policy is sufficiently restrictive. But that’s not today’s story. Today was all about—and only about—giving the Fed flexibility or optionality to back off their path of 75bps hikes. We don’t know what the terminal rate will be, but Powell told us it’s higher than markets expect. CPI reports, labor reports, and the ongoing impact of China’s zero-COVID policy on global growth are all more important than any signal of Fed action. From this point on, we should think slower and steady…until something breaks."


“(The market) does seem to like it so far, not the hike today but maybe the hinting future hikes would be smaller although I would argue that has kind of been the market’s mindset for a few weeks now. So expectations were met they weren’t necessarily exceeded in this latest commentary.”

“Just looking at the volume data it seems the vast majority of people were sitting on the sidelines and saying we are just going to wait to see what happens. And the minute (Powell) is done talking they are going start to focus on what he is going to say next time.”

“There may be less chance he is going to spook the market but if they decide these jobs numbers are just indicating the interest rate increases haven’t worked yet, it could spook the market the other way, that the next interest rate could be higher. I don’t think anybody is out of the woods.

"Obviously, they are very careful about the language they choose, he wouldn’t just throw that out there as a throwaway statement. Rates are up so much that the data is backward looking and the economy is a huge ship – you can’t turn it on a dime – and you don’t want to overdo so maybe it is not that surprising not just that he would say that but that is actually their plan.”


"The statement and the market's reaction indicate that the Fed remains serious about combating inflation and is doing the right thing to get there. ... There were some feelings they might only raise 50 basis points. Investors are glad that the Fed is attacking inflation and being aggressive about it."


“The Fed is finally acknowledging that they’ve already done a lot and it might be prudent to slow the pace of hikes. You can’t keep popping pills until you feel better. Sometimes you have to wait for the medicine to take effect.”


“Certainly, the idea of returning inflation to normal is still the Fed’s full objective, but the interest rate increases over time are starting to take a cumulative effect and the Fed will likely view its future actions on monetary policy through the lens of the cumulative effect of the rate hikes.”

“That means it’s likely we may start to see smaller increases at future FOMC meetings to fine-tune policy instead if these axe swings at inflation, the 75 basis point increases. They my start to whittle away at a more measured pace at future meetings.”

“As much as investors were made to read the tea leaves in the past, (Fed Chairman) Jerome Powell has been fairly transparent about the Fed’s intentions all year. If he says ‘were going to look at the cumulative effects’, that’s what they’ll do, and they will be more data dependent.

“The last thing we need to see regarding what the Fed will do in the short run is the election. If there’s a sense that fiscal policy will be more cooperative with monetary policy, it will make the Fed’s job easier.”

(Compiled by the Global Finance & Markets Breaking News team)