Last week, the Fed increased rates by 25bp to 4.75-5%, two weeks after the SVB debacle and subsequent financial turmoil. But the rhetoric has changed, indicating that the current tightening cycle might be close to its end.

Markets were unsure when forecasting the Fed's decision, split between a 25bp hike and a pause due to the SVB collapse. The Fed decided to raise rates by 25bp to 4.75-5%, the ninth consecutive hike since early 2022, making it clear that inflation was still a major concern. Comments noted that hiring is "running at a robust pace" and that "inflation remains elevated”. Regarding the recent financial turmoil, it said that SVB was an “outlier” in an otherwise “sound US financial system”.

However, the seemingly most important semantics relate to the future direction of interest rates, which have moved from “ongoing increases” to “some additional firming’.

The most likely scenario is that the next (May) meeting could mark the last hike of the cycle, at 5-5.25%. The ‘dot plots’ which are the FOMC members’ average expectations, forecast rates at 5.1% at the end of 2023 and 4.3% at the end of 2024.

The Fed has taken a balanced stance, considering the risks induced by higher rates to the financial sector, while keeping its commitment to restoring price stability and bringing back inflation to 2%. Chairman Powell highlighted the fact that tightening credit conditions, due to the recent financial developments, are “equivalent of a rate hike” while acknowledging that it was too early to draw conclusions about the final impact on the economy. Other FOMC forecasts included GDP growth of 0.4% in 2023 and 1.2% in 2024 with the core PCE inflation rate at 3.6% in 2023, vs 5.2% in 2022.

The Fed, however, did not rule out any further rate increases in the future, should inflation remain uncontrolled. Project Blue still believes that although close to the current cycle peak, interest rates may stay higher for longer, with no cuts expected in 2023. Furthermore, the question remains whether a 2% inflation target is realistic, given rising global protectionism and inflationary pressures related to de-carbonisation and other environmental regulations.