FOMC 03/22: FED raises interest rates 0.25%, Powell continues "higher for longer" policy

Stock market has an extremely strong reversal session after the press conference following FED's decision to keep the 0.25% interest rate increase and continue firmly affirming determination to curb inflation with the "higher for longer" interest rate policy. Not only that, Yellen also stated that the US government is not considering increasing the bank deposit guarantee for US citizens above $250,000, causing investors to immediately shift their attitude amid unease and start panic selling, fearing the return of banking crisis. Panic sell begins from the banking sector and spreads to the entire market, with uncovered put hedges bringing pressure back to the market, pushing SPY down 9 points in the last hour.

FOMC 03/22 Summary:

• FED will continue QT process and sell assets

  • FED WILL CONTINUE SAME PACE OF REDUCING TREASURY, MBS HOLDINGS

• FED may seek to tighten financial conditions through measures other than raising interest rates

  • ...language about "ongoing increases in the target range" will be appropriate removed and replaced with "some additional policy firming may be appropriate"

• FED continues to bolster confidence in the US banking system but also states that the consequences of recent events may not yet be fully visible.

  • The U.S. banking system is sound and resilient. Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. The extent of these effects is uncertain.

• Inflation remains uncontrolled, instead of "has eased"

  • removed inflation "has eased somewhat" and just left "remains elevated"

• Regarding recent events, FED will continue to monitor and assess

  • "The Committee will closely monitor incoming information and assess the implications for monetary policy"

• FED Dot Plot - interest rate forecasts for 2024 and 2025 unchanged since December meeting:

• Unemployment and inflation forecasts show little change compared to after December meeting:

Powell press conference summary:

• Affirms US banking system is safe, however recent events will impact the economy

• The process of curbing inflation is still very long and FED will use every means to bring inflation back to 2%

  • Note Powell mentions "every way" right after discussing banking sector events, implying that bank collapses leading to tighter economic conditions is also a way to reduce inflation when free market lending rates are pushed higher while deposit rates remain nearly 0.

• Too early to change policy based on recent events

• FED will consider pausing rate hikes if most FOMC members support it

• However, FED currently has no plans to cut rates in 2023

• If needed to raise rates higher than expected, FED will do so.

Although both Powell and Yellen continue to affirm a hawkish stance on interest rate policy at least until the end of this year, the free market continues to speculate FED will cut rates in Q3 with 3 rate cuts before 2024:

Conclusion:

As forecasted, FED must continue to hold firm on current policy and tone to avoid losing credibility and market confidence. Investor expectations during the recent rally for FDIC to increase deposit insurance and FED not hiking or cutting rates were overly optimistic, making today's strong reversal inevitable as most put holders and short-sellers have not abandoned their positions during the rally. Recent banking events, though causing significant impact and fear to the economy, create an opportunity for FED to tighten financial conditions further and mitigate risks by strengthening large banks to prepare for an economic recession that FED certainly knows will occur. The most concerning issue now is the huge gap between FED's rate forecasts and the free market, with 3 cuts in the second half of 2023, the money market signaling a bad economic event within the next 6 months, as no other reason could force FED to change policy so drastically.