In today’s decision, the Federal Reserve’s rate-setting committee raised benchmark rates by a quarter percentage point and hinted at further tightening to come – but policymakers also suggested that the economic impact of recent regional bank collapses remained largely unknowable.

At the conclusion of its two-day meeting in Washington, the Federal Open Market Committee unanimously voted to raise the target range for the federal funds rate to 4.75-to-5.00 percent, with no dissents in favour of a smaller or larger move. This brings US rates back to levels last reached in September 2007.

In the official statement setting out the decision, policymakers again noted “modest growth in spending and production” in recent data, highlighted signs of acceleration in the labour market, saying “Job gains have picked up in recent months and are running at a robust pace; the unemployment rate has remained low,” and warned “inflation remains elevated”.

But turmoil in the banking sector is expected to impact growth: “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”.

Warning markets not to interpret the decision too dovishly, policymakers said “The Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time” – but this represented a slight softening in comparison with language that previously called for “ongoing increases” in rates.

According to the accompanying Statement of Economic Projections, officials now expect the headline personal consumption expenditure price index to rise 3.3 percent this year before fading to 2.5 percent next year. Unemployment is seen rising to 4.5 percent by the end of 2023, and growth is thought likely to decelerate, with real output expanding 0.4 and 1.2 percent in the next two years, down from the 0.5- and 1.6-percent rates previously expected. 

The median projection suggests the benchmark federal funds rate is expected to hit 5.125 percent by the end of this year (implying coin-toss odds on an additional rate increase at coming meetings), before falling to 4.25 percent in 2024. Forecasts released in December showed rates touching identical levels this year and 4.125 percent in 2024.

Markets climbed in the moments after the release as traders lowered forecasts for where interest rates might peak. US equities gained, two- and ten-year government bond yields fell and the dollar ticked lower.

Focus is now shifting to the press conference, where Jerome Powell is expected to reiterate a commitment to bringing down inflation – while also assuring investors of the Fed’s willingness and capacity to backstop the banking sector. A more hawkish tone could see trading dynamics reverse direction, but markets are currently positioned for another in a long line of relatively-dovish post-meeting discussions. We wish him luck in navigating an incredibly complex communications challenge.